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Mediatek Analysis report
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™
Client-Driven Solutions, Insights, and Access
15 July 2014
Asia Pacific/China&Taiwan
Equity Research
Technology
Asia Semiconductor Sector PRE RESULTS COMMENT
2Q14 Preview: Reasonable outlook into 3Q14
Figure 1: Sales tracked better across the upstream in 2Q14 2Q-14
Actual
2Q14
QoQ
2Q Orig
CS
QoQ
2Q Street
QoQ2Q-14 Guide
Qtr vs.
Guide
3Q QoQ
(CS)
3Q QoQ
(Street)
TSMC 183,020 23.5% 21.5% 22.6% +21-24% QoQ High-end 12.8% 8.2%
UMC 35,869 13.2% 11.9% 10.3% +Low teens High-end 5.0% 4.5%
Vanguard 5,822 5.7% 4.7% 4.1% +1-6% QoQ High-end 13.5% 7.9%
Foundries 224,711 21.2% 19.4% 7.4% +15-20% High-end 11.4% 7.4%
ASE (ATM) 39,265 14.3% 10.0% N/A +10% QoQ Above 7.0% N/A
ASE (Cons.) 58,615 7.2% 7.2% 5.9% +5-10% QoQ In-line 12.9% 15.2%
SPIL 21,928 21.4% 13.5% 14.8% +11-15% QoQ Above 7.5% 0.8%
Powertech 10,580 14.7% 12.0% 11.7% >10% QoQ Above 5.0% 3.9%
Back-end 91,123 11.1% 10.9% 10.4% +10% Above 10.7% 10.4%
Mediatek 54,133 17.7% 20.5% 14.7% +12-20% QoQ High-end 6.6% 4.6%
Realtek 8,075 10.2% 9.8% 6.5% Up Above 3.1% 4.2%
WPG 113,650 11.0% 7.2% 8.8% +3-8% QoQ Above 8.5% 10.1%
IC Design 175,858 12.9% 11.3% -5.0% +10% Above 5.3% 5.6%
Total 491,692 16.2% 14.7% 7.3% Above 9.1% 7.3% Source: Company data, CS estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ Solid 2Q14 and reasonable 3Q14 expectations set up a good results season. 2Q14 sales tracked well across the group and 3Q14 expectations are up by moderate high single digits QoQ and supported by emerging market smartphones, the Apple refresh, stabilisation of PCs and tight capacity. We already revised up TSMC, ASE, SPIL, Mediatek and Powertech estimates following monthly sales and in this preview report profile expectations on each company and revise up ASM Pacific estimates following capex revisions across the back-end sector.
■ Upward momentum starting to moderate. Following strong outperformance, with foundry up 29% YTD and back-end up 37% YTD and strong sales growth for the upstream +16% QoQ vs mid-high single digit hardware builds, we are seeing rolling forecasts stabilise. We would monitor inventory and expect another late year slowdown and potential inventory correction in 1Q15.
■ Bookings cycle may slow down. We have seen back-end revise up capex
44% since January and is now pointing up 22% YoY for the top five players and supporting bookings momentum and sales growth for ASM Pacific, where we revise up 2Q14 sales from +26% to +32% QoQ, in line with street. Back-end equipment bookings for the industry are now at $286mn/month in line with the average peak and close to where ASM Pacific/back-end seasonally peaks.
■ TSMC / ASE supported by the Apple product cycle. While we are monitoring the impact of the extended tightness and rising inventory triggering a late year correction, we still see some support into Apple cycle with TSMC Apple contribution rising from 3% to 15% of sales and ASE generating 15-20% of iPhone related content in 2H14. For Mediatek, we maintain OUTPERFORM with upside to our NT$570 TP on 19x 2014 EPS, with also reasonable bar for 2H14 and exports/initial LTE offsetting TD slowdown.
Research Analysts
Randy Abrams, CFA
886 2 2715 6366
Nickie Yue
886 2 2715 6364
15 July 2014
Asia Semiconductor Sector 2
Focus table Figure 2: Taiwan tech 2Q14 earnings calendar TW Tech 2Q14 Results Calendar
Ticker Company Date (HKT) Time (HKT) Time (HKT) Conference call details
2330.TW TSMC Randy Abrams 7/16/2014 2:00 PM
3008.TW Largan Precision Pauline Chen 7/17/2014 Dial in: +852-3001-3832; Passcode: 3141381
6239.TW Powertech Randy Abrams 7/22/2014 2:30 PM http://pti.ic.learn.hinet.net/ConferenceLaunch.aspx?aid=G6fsV7fxTQg=
3673.TW TPK Holding Jerry Su 7/24/2014 Dial in: +65 67239388 | Passcode: 27261568
0522.HK ASM Pacific Randy Abrams 7/24/2014 12:30 PM
2308.TW Delta Electronics Pauline Chen 7/29/2014
2311.TW ASE Randy Abrams 7/30/2014 2:00 PM
2409.TW AU Optronics Jerry Su 7/30/2014 2:00 PM +886-2-2192-8016 | Passcode: 989775 #
2325.TW SPIL Randy Abrams 7/30/2014 2:30 PM 8:00 PM
3037.TW Unimicron Pauline Chen 7/31/2014
2454.TW MediaTek Inc. Randy Abrams Late July
5371.TWO Coretronic Corp Jerry Su 8/1/2014 2:30 PM
5347.TWO Vanguard Semi Randy Abrams 8/4/2014 2:00 PM
2360.TW Chroma Jerry Su 8/5/2014 2:30 PM
3034.TW Novatek Micro Jerry Su 8/6/2014 2:00 PM
0981.HK SMIC Randy Abrams 8/7/2014
2303.TW UMC Randy Abrams 8/8/2014
3044.TW Tripod Technology Pauline Chen 8/8/2014
2301.TW Lite-On Tech Pauline Chen 8/13/2014
2385.TW Chicony Pauline Chen 8/14/2014
3698.TW Lextar Derrick Yang 8/14/2014
2618.HK TCL Communications Jerry Su 8/14/2014
2474.TW Catcher Technology Pauline Chen Early August
2498.TW HTC Pauline Chen TBC
8021.TW Topoint Technology Pauline Chen TBC
3311.TW Silitech Technology Pauline Chen TBC
2354.TW Foxconn Tech Pauline Chen TBC
8046.TW Nan Ya PCB Pauline Chen TBC
3189.TW Kinsus Interconnect Pauline Chen TBC
2458.TW Elan Microelectronics Jerry Su TBD
2049.TW Hiwin Jerry Su TBD
3481.TW INX Jerry Su TBD
HIMX.OQ Himax Jerry Su TBD
5280.TW Focaltech Jerry Su TBD
8150.TW ChipMOS Jerry Su TBD
0763.HK ZTE Jerry Su TBD
2369.HK Coolpad Jerry Su TBD
8069.TWO E Ink Jerry Su TBD
2379.TW Realtek Semiconductor Randy Abrams TBD
AMKR.OQ Amkor Randy Abrams TBD
3702.TW WPG Holdings Ltd Randy Abrams TBD
2357.TW Asustek Computer Thompson Wu TBD
4938.TW Pegatron Thompson Wu TBD
2324.TW Compal Electronics Thompson Wu TBD
2382.TW Quanta Computer Thompson Wu TBD
3231.TW Wistron Thompson Wu TBD
2353.TW Acer Inc. Thompson Wu TBD
2347.TW Synnex Thompson Wu TBD
2317.TW Hon Hai Precision Thompson Wu TBD
0992.HK Lenovo Thompson Wu TBD
0861.HK Digital China Thompson Wu TBD
3042.TW TXC Derrick Yang No analyst meeting
2448.TW Epistar Derrick Yang No analyst meeting
2393.TW Everlight Electronics Derrick Yang No analyst meeting
2439.TW Merry Derrick Yang No analyst meeting
6278.TW TSMT Jerry Su No analyst meeting
2384.TW Wintek Corp Jerry Su No analyst meeting
1590.TW Airtac Jerry Su No analyst meeting
1504.TW Teco Jerry Su No analyst meeting
6147.TWO Chipbond Jerry Su No analyst meeting
Conference Conference Call
Source: Company data, Credit Suisse
15 July 2014
Asia Semiconductor Sector 3
2Q14 preview: Solid sales and reasonable outlook for 3Q14 We preview our expectations for 2Q14 results and 3Q14 guidance and key drivers into the
earnings season for our foundry, back-end and IC design coverage reporting in the next
month. Within our Taiwan upstream coverage, most companies topped 2Q14 guidance as
foundry and back-end capacity tightened and triggered inventory rebuilding ahead of the
high season and Apple's product refresh in 2H14. The demand environment remained
healthy for the PC supply chain and emerging market smartphone exports, offsetting some
weakness in tablets and Samsung related components. We already revised up TSMC,
ASE, SPIL, Mediatek and Powertech results following monthly sales and in this preview
revise up our ASM Pacific estimates following capex revisions across the back-end sector.
Foundries: Tight supply continues into 3Q14 Foundry results kick off with TSMC on Wednesday, 16 July, with SMIC, Vanguard and
UMC on the week of 4 August. Due to tight supply across 8" and leading edge nodes
driven by inventory restocking from low levels early in the year and fears of capacity due to
Apple's shift to Taiwan, foundry delivery times have stretched out and pushed some
orders into 4Q14. Foundries will stay positive on 2H14 though may caution to expect a
short correction early next year. We also see focus on TSMC's progress on 16nm as key
issues and its outlook relative to Samsung's 14nm challenge and Intel's push in mobile.
Backend: Business drivers shift in 2H14 The back-end business was supported by non-Apple related drivers in 1H14 including PC
stabilisation, consumer/TV builds, and low-cost smartphones but will shift to the Apple
ramp, game console and 4G LTE in 2H14. The group topped 2Q14 guidance though has
noted upward revisions to rolling forecasts now moderating and stable the past month.
We still expect reasonable growth in 3Q14, with incremental momentum for ASE relative
to the group due to its 2H weighted SiP builds for fingerprint and wearables. While outlook
into results remains favourable, upside is a bit more limited following the strong
outperformance and cyclical signals of inventory and equipment orders more elevated.
IC-design: Weathering the 3G to 4G transition IC design had a solid 2Q14 driven by China brand export demand and octa-core growth
and upside for PC and consumer. Off a better 1H14, we expect guidance to be up by
moderate mid-high single digits QoQ into the peak season, near current street estimates
but below traditional 10-30% QoQ strength. We view Mediatek still weathering the 3G to
4G transition due to strength of export shipments, short gap to peers launching LTE SoCs
in 2H14 and less impact this transition from the China IC vendors. We also expect a
decent outlook for Realtek and WPG into high season demand.
Stock picks: TSMC and ASE supported by the Apple
product cycle While we are monitoring the impact of the extended tightness and rising inventory triggering a
late year correction, we still see some support into Apple cycle with TSMC Apple contribution
rising from 3% to 15% of sales and ASE generating 15-20% of iPhone related content in 2H14.
For Mediatek, we maintain OUTPERFORM with upside to our NT$570 target price on 19x
2014 EPS, with also reasonable bar for 2H14 and exports/initial LTE offsetting TD slowdown.
We also retain OUTPERFORM on Amkor, SPIL, and ASM Pacific into a positive results
season though see less upside following the strong 1H outperformance.
2Q14 tracked better for the
group, 3Q14 should see
moderate growth
Foundry supply stays tight
into 3Q14
Back-end sales supported
by game console, Apple
ramps and 4G LTE in 2H14,
monitor rising inventory and
capex for a late year
adjustment
Mediatek LTE ramp
offsetting some of the TD-
SCDMA pullback
TSMC and ASE supported
by Apple's ramp in 2H14
15 July 2014
Asia Semiconductor Sector 4
Valuation Figure 3: Valuation summary—Foundry, Back-end, IC design
Market Cap Price Target Inv'ment Target P/E P/B ROE
US$mn 14-Jul Local Curcy Rating upside 2014 2015 2014 2015 2014 2015
Foundry
TSMC 114,770 132.5 150.0 OPFM 13.2% 14.1 13.2 9.4 10.0 26.8% 23.6%
UMC 6,612 15.9 14.0 NTRL -11.7% 19.5 17.2 0.8 0.9 4.7% 5.3%
SMIC 3,302 0.75 0.73 NTRL -2.7% n.m n.m n.m n.m 6.1% 6.7%
Vanguard Semi 2,516 47.7 50.0 NTRL 4.8% 13.2 11.4 3.6 4.2 21.9% 23.1%
Total 127,200 14.4 13.5 3.7 3.4 24.8% 22.9%
Packaging & testing
ASE 10,209 39.4 47.0 OPFM 19.3% 14.6 12.5 2.7 3.2 16.2% 17.3%
SPIL 5,168 49.8 56.0 OPFM 12.4% 12.6 11.7 3.9 4.2 18.4% 18.4%
Powertech 1,316 51.5 63.0 OPFM 22.3% 13.5 12.1 3.8 4.3 9.6% 10.3%
Amkor 2,569 11.1 8.4 OPFM -24.4% 15.3 13.6 0.7 0.8 16.4% 15.7%
ASM Pacific 33,769 84.4 97.0 OPFM 14.9% 24.1 19.8 3.5 4.3 19.7% 22.4%
Total 16,693 6.0 5.1 1.2 1.1 18.5% 20.0%
IC design
MediaTek Inc. 24,353 503.0 570.0 OPFM NA 16.8 15.2 30.0 33.0 21.4% 20.9%
Realtek Semiconductor1,577 93.8 84.0 NTRL -10.4% 15.6 14.8 6.0 6.3 16.6% 18.4%
WPG Holdings Ltd 2,243 40.6 41.0 NTRL 1.1% 11.9 10.5 3.4 3.9 13.6% 14.1%
Total 29,016 15.3 13.7 3.6 3.3 22.7% 22.2% Source: Company data, Credit Suisse estimates
Figure 4: Factoring in some decline of TSMC's share at
QCOM/Apple
Figure 5: MIIT data indicates that LTE shipment is up to
35% of total units shipped in June 2011 2012 2013 2014 2015 2016
Qualcomm Production $3,318 $4,352 $6,260 $6,736 $7,319 $8,270
Qualcomm TSMC $2,086 $2,953 $4,426 $4,716 $4,391 $4,549
TSMC Share of QCOM 63% 68% 71% 70% 60% 55%
Apple Production $1,630 $2,975 $3,094 $4,371 $4,405 $4,550
Apple TSMC $0 $0 $0 $1,878 $3,083 $2,958
TSMC Share of Apple 0% 0% 0% 43% 70% 65%
Rest of TSMC $12,457 $14,185 $15,685 $18,176 $19,822 $21,639
YoY Growth 2.8% 13.9% 10.6% 15.9% 9.1% 9.2%
Total TSMC $14,543 $17,137 $20,111 $24,769 $27,297 $29,145
YoY Growth 9.2% 17.8% 17.4% 23.2% 10.2% 6.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
5
10
15
20
25
30
35
40
45
50
Jan-1
2
Mar-1
2
Ma
y-12
Jul-1
2
Sep-1
2
Nov-1
2
Jan-1
3
Mar-1
3
Ma
y-13
Jul-1
3
Sep-1
3
Nov-1
3
Jan-1
4
Mar-1
4
May-1
4
Mkt shareShipments: mn
LTE % 2G 3G LTE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, MIIT
Figure 6: SPIL has outperformed TAIEX by 25% YTD Figure 7: Back-end trading above mid-cycle P/B
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 TAIEX Average SPIL Average 2014 TAIEX
SPIL Indexed share price
-40
-20
0
20
40
60
80
100
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Jan-0
2
Aug
-02
Ma
r-0
3
Oct-
03
Ma
y-04
Dec-0
4
Jul-0
5
Fe
b-0
6
Sep
-06
Apr-
07
Nov-0
7
Jun-0
8
Jan-0
9
Aug
-09
Ma
r-1
0
Oct-
10
Ma
y-11
Dec-1
1
Jul-1
2
Fe
b-1
3
Sep
-13
Apr-
14
SPIL PB premium ASE SPIL
PB (x) %
Source: Company data, Credit Suisse research, TEJ Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 5
Foundries: Tight supply continues into 3Q14 Foundry results kick off with TSMC on Wednesday, 16 July, with SMIC, Vanguard and
UMC on the week of 4 August. Due to tight supply across 8" and leading edge nodes
driven by inventory restocking from low levels early in the year and fears of capacity due to
Apple's shift to Taiwan, foundry delivery times have stretched out and pushed some
orders into 4Q14. Foundries should stay positive on 2H14 though may caution to expect a
short correction early next year. We also see focus on TSMC's progress on 16nm as key
issues and its outlook relative to Samsung's 14nm challenge and Intel's push in mobile.
We highlight key expectations for the foundries.
■ TSMC to retain its bullish outlook. We expect TSMC to have strong 2Q14 results
with sales already at the top end of guidance, margins supported by full capacity and
one-time profit booking from sale of some Vanguard shares helping the headline EPS.
We believe yields are ramping up well on 20nm at the largest new customer, helping
hold up margins into 3Q14 despite the high depreciation increase (+27% QoQ) and
new node always starting up well below corporate GMs. Beyond the 20nm ramp,
TSMC should update progress on 16nm FF+ tape-outs for 2H15, progress with INFO
for smartphone adoption and view on medium-term growth opportunities from higher
performance computing and Internet of Things.
The company is also moving closer to a period of moderate growth after its strong
20nm/28nm market share so should begin shifting focus on rising cash flows and
dividend yield, with capex staying more stable at current levels. Key swing factors are
still TSMC's position at its two largest customers so we would look for confidence
holding share here and overall in the next few years despite competitive inroads. We
also look for an update on the industry cycle, where TSMC used several 2Q
conferences to guide toward a future 4Q correction, though this year may push that
out a quarter with tight capacity shifting some orders out from 3Q to 4Q and potentially
also limiting some overbuild in its view.
■ UMC spirits should be lifted by 28nm ramp and a better cycle. UMC 2Q14 sales
were NT$35.9 bn, +13.2% QoQ, in line with implied guidance for low teens QoQ
growth (shipment guided to grow low teens and ASPs stable). The company is seeing
pretty strong demand from its middle to lagging nodes in 2Q14 from TV, set-tops,
connectivity and HDD/SSD controllers driving growth and PCs rebounding. We also
now expect the company to guide up 3Q14 high single digit to low teens QoQ versus
original +5% QoQ as customers respond to tight capacity by holding in orders and
ramp for 2H14 LTE smartphones in China.
UMC has made progress on its 28nm and is now expanding capacity from 10K WPM
to 12K WPM and should reach its 1% of sales in 2Q14 and 5%+ by year-end, with
over half on High-K metal gate. UMC highlighted 10 customers and 20 products
though we believe most of the business will be with its core mobile and
communications customers (BRCM, Mediatek, QCOM, Realtek and STM).
GlobalFoundries and IDMs Samsung/Intel capping a sustained upside beyond the
cyclical rebound and catalyst from 28nm finally moving ahead.
■ SMIC gaining from its leverage to the China industry support and growth. SMIC
shares have rallied 53% YTD on longer-term positioning for its opportunity in the China
semiconductor chain and potential to benefit from rising government support and
subsidies on manufacturing and chip design. We see fair value at 1.25x P/B, giving it
some growth premium to book value despite mid-single digit ROE. We view the recent
rally outperforming fundamentals which are only slightly better than guidance and in line
with market expectations. We expect sales at the high end of 2Q14 guidance for sales
Foundries should stay
positive on 2H14 though
may caution to expect a
short correction early next
year
15 July 2014
Asia Semiconductor Sector 6
up 12-15% and GMs to reach the high end of 22-24% guidance. We estimate 3Q14
sales +13% QoQ, slightly below street's +15% QoQ as the company has still a modest
customer base and limited capacity for 40nm. We believe the company will continue to
focus on optimising profitability and should have GMs trend toward mid-20% level in
3Q14. We see strong 2Q14 results and 3Q14 guidance but may see adjustments from
4Q14 as inventory already built coming out of 1Q and may build again exiting 2Q. We
believe foundry customers are booking out orders now into early 4Q14 as foundry
capacity is approaching full across all the top foundries.
■ Vanguard fab purchase comes in for 2H14. Vanguard 2Q14 sales reached NT$5.8
bn, +5.7% QoQ, above CS/Street +4.7%/+4.1% QoQ and guidance for shipments and
ASPs both up 1-3% QoQ, driven by power management IC. However, large panel ICs
mix declined due to continued inventory adjustments after the 1Q14 pull-ins. Small
panels were flat in the quarter but impacted by capacity constraints that drove
management to allocate mix to higher-margin products.
3Q14 will be a high season and the company views supply/demand as balanced, with
no slowdown from both large and small panel. We expect further mix shift to higher
margin power management and also higher utilisation to help outset some of the
Nanya fab drag. The acquired Nanya fab will add 30k capacity and 18k shipments at
60% utilisation starting in 3Q14, adding 12-13% growth off Vanguard's current 140K
WPM capacity albeit at lower ASPs than Vanguard's mix. We still factor close to
300bp GM decline in 3Q14 as the company takes on the weaker product mix. We
estimate the Nanya fab will give Vanguard an EPS lift in 2014/2015 from
NT$3.26/NT$3.59 to NT$3.60/NT$4.20 as 2H14 growth is no longer capped and the
company can now achieve 10% additional growth off 2H14 with flat depreciation/sales
to allow stable GMs.
Figure 8: Credit Suisse and street expectations for 2Q14/3Q14/4Q14 and 2014/2015 In NT$ mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015
(NT$ mn) CS Street CS Street CS Street CS Street CS Street
TSMC sales 183,020 181,707 206,530 197,967 206,530 196,635 744,295 721,478 818,911 812,073
Growth 23.5 22.6 12.8 8.2 0.0 -0.7 24.7 20.8 10.0 12.6
Operating Profit 69,594 78,804 76,812 277,732 297,134
Net income 56,916 56,371 70,481 66,297 68,604 63,325 243,822 232,762 259,366 255,486
EPS (NT$) 2.20 2.17 2.72 2.55 2.65 2.43 9.40 8.92 10.00 9.81
UMC sales 35,470 34,960 37,243 37,064 34,239 35,270 138,646 139,027 149,638 149,615
Growth 11.9 10.3 5.0 4.5 -8.1 -4.8 12.0 20.2 7.9 7.6
Operating Profit 3,350 3,859 1,355 9,505 11,161
Net income 3,158 2,787 4,354 3,813 1,458 2,384 10,149 10,110 11,500 11,403
EPS (NT$) 0.25 0.22 0.35 0.31 0.12 0.20 0.81 0.82 0.92 0.91
Vanguard sales 5,768 5,731 6,546 6,221 6,501 6,153 24,322 23,666 27,879 26,853
Growth 4.7 4.1 13.5 7.9 -0.7 -1.1 15.1 12.0 14.6 13.5
Operating Profit 1,645 1,696 1,655 4,837 6,496
Net income 1,437 1,385 1,484 1,385 1,443 1,353 5,706 5,495 6,654 6,259
EPS (NT$) 0.91 0.85 0.94 0.86 0.91 0.83 3.60 3.35 4.20 3.71
SMIC sales (US$mn) 519 529 586 596 610 588 2,166 2,166 2,404 2,460
Growth 15.0 17.3 13.0 14.9 4.0 -1.4 4.7 4.7 11.0 13.6
Operating Profit 39 56 58 184 211
Net income 34 39 49 52 51 46 156 151 183 195
EPS (HK$) 0.007 0.101 0.010 0.225 0.011 0.155 0.034 0.031 0.039 0.047 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
We profile our expectations for results and guidance along with themes and issues for the
companies in our coverage below.
15 July 2014
Asia Semiconductor Sector 7
TSMC: Apple ramp to sustain the outlook, factoring
multi-sourcing further out
Earnings details: 16 July 2PM HKT
TSMC will report results on Wednesday 16 July at 2pm Taiwan time (2am ET) with a live
conference at the Far Eastern Hotel Taipei with dial-ins US: +1 845 675 0437, Hong Kong:
+852 2475 0994, UK: +44 203 059 8139; Password TSMC. The conference will be
attended by Chairman Dr. Morris Chang, Co-CEOs Dr. Mark Liu and Dr. C.C. Wei and
CFO Ms. Lora Ho. We expect strong 2Q14 results consistent with the upside on sales and
guidance for low-mid teens QoQ growth in 3Q14, with strong builds for the Apple AP ramp
supporting 2H14 momentum and some tightness pushing orders into 4Q14. We also
expect the company to maintain its bullish tone on its technology leadership and
competitive advantage.
We preview our expectations for results and guidance and also key themes for the
investor conference:
Figure 9: Credit Suisse versus street estimates for 2Q14/3Q14/4Q14 and 2014-2015 In NT$ mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales 183,020 181,707 NT$180-183bn 206,530 197,967 206,530 196,635 744,295 721,478 818,911 812,073 878,978 881,608
Chg (%) 23.5 22.6 +21.4-23.5% QoQ 12.8 8.2 0.0 -0.7 24.7 20.8 10.0 12.6 7.3 8.6
GM (%) 49.0 49.0 47.5-49.5% 49.0 48.7 48.3 47.3 48.5 48.1 47.8 47.2 47.5 46.5
OpM (%) 38.0 37.3 36.5-38.5% 38.2 37.7 37.2 36.2 37.3 36.8 36.3 36.4 35.8 36.4
Net Inc. 56,916 56,371 FX NT$30.1, Tax 21% 70,481 66,297 68,604 63,325 243,822 232,762 259,366 255,486 275,548 275,849
EPS (NT$) 2.20 2.17 2.72 2.55 2.65 2.43 9.40 8.92 10.00 9.81 10.63 10.58
ADR EPS 0.37 0.36 0.45 0.43 0.44 0.41 1.57 1.50 1.67 1.65 1.77 1.77 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 reaches the high end of guidance as capacity fills up. TSMC reported 2Q14
sales at NT$183.0 bn, up 23.5% QoQ, and top of its NT$180-183 bn range driven by
broad based strength and inventory restocking. After June sales, we lifted GMs to
49.0% vs 47.5-49.5% range and OpM from 37.4% to 38.0% vs 37.5-39.5% range on
operating leverage and full utilisation. We also factored in TSMC's disposal of 82mn
(5%) of Vanguard's shares at NT$42.55/share at a carrying cost of NT$16.74/share,
so we estimate a NT$2.1 bn profit or NT$0.07-0.08 EPS non-op contribution. We
raised our 2Q14 EPS from NT$2.06 to NT$2.20, above street's NT$2.15.
Figure 10: TSMC’s operating metrics—Credit Suisse at US$10 bn capex in 2014 and stays flat in 2015 NT$ mn 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E 2013 2014E 2015E 2016E
Capacity (8" WPM, Kpcs) 3,983 4,101 4,360 4,412 4,492 4,645 4,769 4,778 16,856 18,683 20,493 22,233
Sequential change (%) -1% 3% 6% 1% 2% 3% 3% 0% 11% 11% 10% 8%
Shipment (8" WPM. Kpcs) 3,570 4,034 4,194 3,868 3,779 4,634 5,032 4,981 15,666 18,426 19,404 20,827
Sequential change (%) 0% 13% 4% -8% -2% 23% 9% -1% 12% 18% 5% 7%
Utilization rate (%) 90% 98% 96% 88% 84% 100% 106% 104% 93% 99% 95% 94%
ASP (US$) 1,154 1,180 1,178 1,166 1,200 1,219 1,279 1,292 1,173 1,251 1,315 1,315
Sequential change (%) 0% 2% 0% -1% 3% 2% 5% 1% 5.0% 6.6% 5.1% 0.0%
Wafer Revenue (US$ mn) 4,121 4,776 4,973 4,512 4,537 5,649 6,434 6,434 18,383 23,054 25,511 27,383
Total Revenue (NT$ mn) 132,755 155,886 162,577 145,806 148,215 183,020 206,530 206,530 597,025 744,295 818,911 878,978
Revenue % of 28nm&below 24% 29% 32% 34% 34% 37% 46% 50% 30% 43% 55% 54%
Capex (US$ mn) 2,731 2,628 1,835 2,503 3,799 2,667 2,134 1,400 9,697 10,000 10,002 10,533
Capex/revenue (%) 61% 50% 34% 51% 78% 44% 31% 20% 48% 40% 37% 36%
Gross margin (%) 45.8% 49.0% 48.6% 44.5% 47% 49% 49% 48% 47.1% 48.5% 47.8% 47.5%
Operating margin (%) 33% 37% 37% 33% 35% 38% 38% 37% 35% 37% 36% 36% Source: Company data, Credit Suisse estimates
2Q14 sales +23.5% QoQ,
reaching the high end of
guidance
15 July 2014
Asia Semiconductor Sector 8
■ GM should hold up despite higher depreciation. TSMC is facing its biggest
depreciation test in the next two quarters but being managed well due to full utilisation,
strong share, good pricing, cost reductions and yields. The company should have a
sharp 14% QoQ increase in 2Q14 followed by a further 27% QoQ increase in 3Q14 as
its 20nm capacity starts being depreciated, lifting depreciation from 24% to 29% of
sales by year-end. We are modelling GMs holding up at 49% in 3Q14 and only down
slightly to 48.3% in 4Q14, with full year GMs 140 bp higher due to improved structural
profitability on the yields, pricing and cost down measures. TSMC's depreciation will
begin normalising next year and will only grow by single digits by 2016.
Figure 11: TSMC is maintaining its GMs despite depreciation up 35% in 2014 and up 14%
in 2Q14 and 27% in 3Q14
4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015
Sales $145,806 $148,215 $183,020 $206,530 $206,530 $597,024 $744,295 $818,911
QoQ / YoY 1.7% 23.5% 12.8% 0.0% 17.8% 24.7% 10.0%
Depreciation (37,334) (37,791) (43,159) (54,942) (55,766) (142,157) (191,658) (226,434)
QoQ / YoY 1.2% 14.2% 27.3% 1.5% 18.8% 34.8% 18.1%
Dep/Sales -26% 25.5% 23.6% 26.6% 27.0% 23.8% 25.8% 27.7%
Non-Dep / Wafer 11,279 10,591 10,834 10,022 10,222 11,101 10,397 10,365
Total COGS 80,965 77,815 93,366 105,368 106,688 316,058 383,236 427,553
Gross Profit $64,841 $70,400 $89,654 $101,162 $99,842 $280,966 $361,059 $391,358
GM% 44.5% 47.5% 49.0% 49.0% 48.3% 47.1% 48.5% 47.8% Source: Company data, Credit Suisse estimates
Figure 12: 2014 the worst year for depreciation growth Figure 13: Higher ASPs still offsetting depreciation rises
-5%0%5%10%15%20%25%30%35%40%45%
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Capex Depreciation Depreciation / Sales YoY Increase
Depreciation and capex (NT$)
YoY Depr. Increase
5 year equipdepreciation
period
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
0
1,000
2,000
3,000
4,000
5,000
6,000 1
Q9
7 3
Q9
7 1
Q9
8 3
Q9
8 1
Q9
9 3
Q9
9 1
Q0
0 3
Q0
0 1
Q0
1 3
Q0
1 1
Q0
2 3
Q0
2 1
Q0
3 3
Q0
3 1
Q0
4 3
Q0
4 1
Q0
5 3
Q0
5 1
Q0
6 3
Q0
6 1
Q0
7 3
Q0
7 1
Q0
8 3
Q0
8 1
Q0
9 3
Q0
9 1
Q1
0 3
Q1
0 1
Q1
1 3
Q1
1 1
Q1
2 3
Q1
2 1
Q1
3 3
Q1
3 1
Q1
4 3
Q1
4E
1Q
15E
3Q
15E
1Q
16E
3Q
16E
1Q
17E
3Q
17E
US$Shipments (mn)
Shipments ASPs
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ 2H14 strength intact as long-awaited Apple business ramps. We expect bullish
tone on 2H14 from the high 28nm HKMG share and 100% 20nm share. We model in
+13% QoQ in 3Q14 as Apple grows from 3% to 10%+ and other nodes are full, forcing
some rescheduling into 4Q14. GMs could hold flat as firm pricing and the full capacity
offsets +27% QoQ depreciation. Management should address 16nm FF+ volumes for
2H15, with design time for the FF+ the bottleneck rather than yields. While GF is
ordering for NY Malta now, we believe its 14nm ramp will be after TSMC and
Samsung.
15 July 2014
Asia Semiconductor Sector 9
Figure 14: Apple ramping to 15% of sales in 4Q14 – Apple adds 7 points to 3Q14 / 4Q14 growth Apple volumes (mn units) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015
iPad 19.5 14.6 14.1 26.0 16.4 13.1 12.4 21.1 74.2 63.0 69.2
iPhone 37.4 31.2 33.8 51.0 43.7 37.2 39.4 59.1 153.5 179.3 177.8
iPods 2.8 2.1 1.5 3.0 1.3 1.0 1.3 1.6 9.4 5.2 3.5
Apple TV set-top units 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 1.6 1.7 2.0
Total units (mn) 60.1 48.3 49.8 80.5 61.8 51.7 53.5 82.3 238.7 249.2 252.5
QoQ / YoY -23% -20% 3% 62% -23% -16% 3% 54% 4% 1%
Apple mfg potential (mn units) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015
Blended die size 118 105 108 109 107 107 107 107 108 108 108
Die per wafer 407 459 446 442 448 449 451 448 445 445 445
Wafer per quarter (thousands) 148 105 112 182 138 115 119 184 546 555 565
Wafer per month demand 49.3 35.1 37.2 60.6 46.0 38.4 39.5 61.2 182.1 185.1 188.2
TSMC potential 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015
Wafer demand (thousands) 148 105 112 182 138 115 119 184 546 555 565Revenue per 12" wafer, US$ 5,894 5,747 5,603 5,463 8,200 7,995 7,795 7,600 5,663 7,873 7,799
Apple Processor Sales (US$ mn) $871 $604 $625 $994 $1,131 $920 $925 $1,395 $3,094 $4,371 $4,405
TSMC share: 0% 0% 0% 0% 0% 20% 70% 75% 0% 43% 70%
TSMC Apple assumption: $0 $0 $0 $0 $0 $184 $647 $1,046 $0 $1,878 $3,075
Apple % of TSMC 0% 0% 0% 0% 0.0% 3.0% 9.4% 15.2% 0.0% 7.6% 11.3%
Rest of TSMC $4,509 $5,225 $5,441 $4,936 $4,900 $5,917 $6,237 $5,838 $20,111 $22,892 $24,222
QoQ / YoY 0.1% 15.9% 4.1% -9.3% -0.7% 20.7% 5.4% -6.4% 13.8% 5.8%
TSMC sales (US$ mn) $4,509 $5,225 $5,441 $4,936 $4,900 $6,101 $6,884 $6,884 $20,111 $24,769 $27,297 QoQ / YoY 0.1% 15.9% 4.1% -9.3% -0.7% 24.5% 12.8% 0.0% 23.2% 10.2%
Source: Company data, Credit Suisse estimates
■ Factoring in Qualcomm/Apple multi-sourcing scenarios. Although TSMC will
remain confident in its share position, we acknowledge potential for the large
customers to multi-source and Samsung to secure some Qualcomm/Apple and a few
smaller customers with its 14nm process. Qualcomm has been trying to multi-source
for several years although TSMC's share has instead increased from 63% to 70% as
other foundries lagged on 28nm yields and move up to 28nm HKMG. We do factor
Samsung being more competitive followed by its process licensee GlobalFoundries a
couple quarters later to take some market share. Our base case assumes TSMC's
QCOM allocation falls from 70% to 60% and Apple at 70%, still allowing TSMC to
grow +10% YoY in 2015 and generate NT$10 EPS.
Figure 15: Factoring in some decline of TSMC's share at
QCOM/Apple
Figure 16: TSMC Stock price range based on 12-17x P/E
and NT$8-11 earnings range from QCOM/Apple 2011 2012 2013 2014 2015 2016
Qualcomm Production $3,318 $4,352 $6,260 $6,736 $7,319 $8,270
Qualcomm TSMC $2,086 $2,953 $4,426 $4,716 $4,391 $4,549
TSMC Share of QCOM 63% 68% 71% 70% 60% 55%
Apple Production $1,630 $2,975 $3,094 $4,371 $4,405 $4,550
Apple TSMC $0 $0 $0 $1,878 $3,083 $2,958
TSMC Share of Apple 0% 0% 0% 43% 70% 65%
Rest of TSMC $12,457 $14,185 $15,685 $18,176 $19,822 $21,639
YoY Growth 2.8% 13.9% 10.6% 15.9% 9.1% 9.2%
Total TSMC $14,543 $17,137 $20,111 $24,769 $27,297 $29,145
YoY Growth 9.2% 17.8% 17.4% 23.2% 10.2% 6.8%
TSMC EPS based on QCOM/Apple share$8.00 $8.50 $9.00 $10.00 $10.50 $11.00
12x $96 $102 $108 $120 $126 $132
13x $104 $111 $117 $130 $137 $143
14x $112 $119 $126 $140 $147 $154
15x $120 $128 $135 $150 $158 $165
16x $128 $136 $144 $160 $168 $176
17x $136 $145 $153 $170 $179 $187TS
MC
mu
ltip
le
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We also present sensitivity analysis on those two customers as they represent largest
swing factor in 2H15/2016. On our base case of NT$10 EPS in 2015, TSMC's stock at
15x and a slight premium to the TAIEX 14x would reach NT$150. A range of earnings
from NT$8-11 and multiples across TSMC's 12-17x range could create a swing of
outcomes for the share price with about 30% potential downside and 20% further upside
from our base case.
15 July 2014
Asia Semiconductor Sector 10
Figure 17: TSMC 2015 sales growth sensitivity to
allocation of Qualcomm and Apple’s manufacturing
Figure 18: TSMC 2015 EPS sensitivity to allocation of
Qualcomm and Apple’s manufacturing
TSMC's Qualcomm allocation
$0 30% 40% 50% 60% 70% 80%
0% -11.1% -8.2% -5.2% -2.2% 0.7% 3.7%
15% -8.4% -5.5% -2.5% 0.4% 3.4% 6.3%
25% -6.7% -3.7% -0.8% 2.2% 5.2% 8.1%
30% -5.8% -2.8% 0.1% 3.1% 6.0% 9.0%
60% -0.4% 2.5% 5.5% 8.4% 11.4% 14.3%
70% 1.3% 4.3% 7.2% 10.2% 13.2% 16.1%
80% 3.1% 6.1% 9.0% 12.0% 14.9% 17.9%
100% 6.7% 9.6% 12.6% 15.5% 18.5% 21.4%
TS
MC
's A
pp
le
All
ocati
on
TSMC's Qualcomm allocation TSMC EPS based on QCOM/Apple share
$10 30% 40% 50% 60% 70% 80%
0% $6.19 $6.68 $7.19 $7.70 $8.23 $8.77
15% $6.64 $7.14 $7.65 $8.18 $8.71 $9.26
25% $6.94 $7.45 $7.97 $8.50 $9.04 $9.60
30% $7.09 $7.60 $8.13 $8.66 $9.21 $9.77
60% $8.02 $8.56 $9.10 $9.66 $10.23 $10.81
70% $8.34 $8.88 $9.44 $10.00 $10.58 $11.16
80% $8.67 $9.21 $9.77 $10.35 $10.93 $11.52
100% $9.33 $9.89 $10.46 $11.05 $11.65 $12.26
TS
MC
's A
pp
le
All
ocati
on
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Technology progress on track, though 14nm competition will still heat up. (1)
16nm on track to ramp in 2015. TSMC noted at its AGM over 20 tape-outs on 16nm
FF+ in 2014, up from 15 from its earlier commentary, and also maintained confident
that its 16nm FF+ will deliver the strongest performance among existing 16/14nm
technologies. (2) 10nm for ramp in 2016. Management expects "important tape-outs"
and risk production next year, and also maintains its target for ramp in 2016. (3) 7nm
for R&D. TSMC's 7nm R&D has started and its progress will also continue
simultaneously with 10nm. However, we believe TSMC is now competing fiercely for
16nm business with its FF+ against Samsung with our base case expecting some
QCOM/Apple and a few smaller customers to be at Samsung from late 2015.
Figure 19: TSMC’s next few nodes be shorter and faster Figure 20: Continued technology migration
0%
10%
20%
30%
40%
50%
60%
70%
80%
1Q
00
4Q
00
3Q
01
2Q
02
1Q
03
4Q
03
3Q
04
2Q
05
1Q
06
4Q
06
3Q
07
2Q
08
1Q
09
4Q
09
3Q
10
2Q
11
1Q
12
4Q
12
3Q
13
2Q
14E
1Q
15E
4Q
15E
3Q
16E
2Q
17E
TSMC contribution from n TSMC contribution from n-1
250/180 180/150 150/130 130/90 90/65 65/40 40/28 28/20 20/16 10
-
10,000
20,000
30,000
40,000
50,000
60,000
1Q
99
3Q
99
1Q
00
3Q
00
1Q
01
3Q
01
1Q
02
3Q
02
1Q
03
3Q
03
1Q
04
3Q
04
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
Revenue (NT$)
0.5um+ 0.25/0.35um 0.15/0.18um 0.13um
90nm 65nm 40nm 28nm
20nm 16nm 10nm
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 21: TSMC higher leading edge pricing on the new
nodes supporting rising blended ASPs
Figure 22: TSMC 28nm/20nm ramp by customer
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
4Q
00
3Q
01
2Q
02
1Q
03
4Q
03
3Q
04
2Q
05
1Q
06
4Q
06
3Q
07
2Q
08
1Q
09
4Q
09
3Q
10
2Q
11
1Q
12
4Q
12
3Q
13
2Q
14E
1Q
15E
4Q
15E
3Q
16E
2Q
17E
150nm 130nm 90nm 65nm40nm 28nm 20nm 16nm FF+10nm Blended ASP
US$ 8" equiv. ASP
0%
10%
20%
30%
40%
50%
0
600
1,200
1,800
2,400
3,000
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
TSMC 28nm and below (%)
28nm and below US$mn
Qualcomm QCT Apple NVIDIAAMD graphics AMD NBs/chips/gaming OracleAltera Xilinx MediatekSpreadtrum Broadcom TILSI Freescale Marvell
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 11
■ Shifting toward moderating growth but rising cash returns. After this year’s sharp
Apple ramp on top of very high 28nm/20nm share through 1H15, TSMC would need to
be content with mobile TAM slowing to a still respectable mid-high single digit growth
the next couple years but also some sharing of its 14nm mobile back with Samsung.
We expect the company to hold capex flat to down and focus on tool-reuse on new
nodes rather than new green-field lines of capacity. As a result, we project a harvest
period with FCF increasing from US$4.5 bn in 2014 to US$6.5 bn in 2015 and lifting
FCF yield to 6% by 2015, allowing dividend to rise from NT$3 to NT$3.50-4.00 next
year and start on a path toward dividend growth, a cash return trend that is re-rating
some chip stocks now.
Figure 23: FCF yields set to rebound from 2014 Figure 24: Cash flows can support rising dividends soon
0%
2%
4%
6%
8%
0
100,000
200,000
300,000
400,000
500,000
600,000
CY
02
CY
03
CY
04
CY
05
CY
06
CY
07
CY
08
CY
09
CY
10
CY
11
CY
12
CY
13
CY
14
E
CY
15
E
Operating cash flow Capital spending FCF Yield (%)
Capex and FCF (NT$mn)Capex and FCF (NT$mn) FCF Yield (%)Capex and FCF (NT$mn)Capex and FCF (NT$mn)
-30%
-10%
10%
30%
50%
70%
90%
0
2,000
4,000
6,000
8,000
10,000
12,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Capex (US$mn) Capacity YoY (%) Shipment YoY (%)
US$mn (%)Capex (US$mn) Shipments and Capacity (YoY)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Maintain OUTPERFORM at NT$150 TP. We view TSMC’s valuation as in line at
15.4x/14.2x 2014E/2015E EPS vs Taiwan tech's 15.4x/13.8x. We recently raised our
2014/2015 estimates from NT$8.75/NT$9.50 to NT$9.40/NT$10.0 and target price
from NT$137 to NT$150, based on same 15x average 2014/2015 EPS. We remain
positive into strong results and see story post the Apple ramp shifting toward
moderating growth but higher FCF and dividends.
Figure 25: TSMC PE band – trading at 13.4x forward EPS Figure 26: TSMC PB band – trading at 2.9x forward BV
10.5x
13x
15x
17x
20
30
40
50
60
70
80
90
100
110
120
130
140
150
Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14
(NT$)
2x
2.7x
3.1x
3.5x
20
40
60
80
100
120
140
160
180
200
Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14
(NT$)
Source: Company data, Credit Suisse research, TEJ Source: Company data, Credit Suisse research, TEJ
TSMC valuation in line with
Taiwan tech
15 July 2014
Asia Semiconductor Sector 12
UMC: 2Q14 growth in line with guidance and
expectations
Earnings details: 8 Aug 5PM HK time
Figure 27: UMC 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs street In NT$ mn, unless otherwise stated
NT$ 2Q14 3Q14 4Q14 2014 2015 2016
(mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales 35,470 34,960 Up low teens 37,243 37,064 34,239 35,270 138,646 139,027 149,638 149,615 159,473 155,501
Chg (%) 11.9 10.3 ASPs flat 5.0 4.5 -8.1 -4.8 12.0 20.2 7.9 7.6 6.6 3.9
GM (%) 24.3 22.4 25% foundry GM 25.2 23.4 20.5 20.6 22.3 21.3 21.0 20.4 21.1 17.9
OpM (%) 9.4 7.9 High 80% Util. 10.4 8.9 4.0 5.8 6.9 6.9 7.5 7.7 7.8 8.4
Net Inc. 3,158 2,787 4,354 3,813 1,458 2,384 10,149 10,110 11,500 11,403 12,633 11,885
EPS (NT$) 0.25 0.22 0.35 0.31 0.12 0.20 0.81 0.82 0.92 0.91 1.01 0.97ADR EPS
(US$) 0.04 0.01 0.06 0.01 0.02 0.01 0.14 0.14 0.15 0.15 0.17 0.16 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 sales in line, 3Q14 may get revised higher. UMC 2Q14 sales were NT$35.9 bn,
+13.2% QoQ, in line with implied guidance for low teens QoQ growth (shipment guided
to grow low teens and ASPs stable). The company is seeing pretty strong demand from
its middle to lagging nodes in 2Q14 from TV, set-tops, connectivity and HDD/SSD
controllers driving growth and PCs rebounding. With tighter 8" capacity and higher than
expected utilisation, we expect GMs closer to our 24.3%, vs street at 22.3% and foundry
GM guidance of 25%. We also now expect the company to guide up 3Q14 high single
digit to low teens QoQ versus original +5% QoQ as customers respond to tight capacity
by holding in orders and ramp for 2H14 LTE smartphones in China.
■ 28nm finally ramping up. UMC has made progress on its 28nm and is now
expanding capacity from 10K WPM to 12K WPM and should reach its 1% of sales in
2Q14 and 5%+ by year-end, with over half on High-K metal gate. UMC highlighted 10
customers and 20 products though we believe most of the business would be with its
core mobile and communications customers (BRCM, Mediatek, QCOM, Realtek and
STM). While the progress is encouraging, the ramp from 0 to 5% is four years after a
similar ramp on 40nm vs traditional 2.0 to 2.5 year pace, dampening the lifetime
profitability for the node and limiting the potential size and breadth of business as
some customers move to 20/16nm in 2014/15.
Figure 28: 28nm finally to have 5% sales by 4Q14 Figure 29: Communications stable at about NT$16 bn/qtr
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
Wafer Sales (NT$)
0.25um 0.18um 0.13um 90nm
65nm 40nm 28nm
2.5 years 2 years 2.5 years 3 years 4 years
-
4,000
8,000
12,000
16,000
20,000
4Q
99
2Q
00
4Q
00
2Q
01
4Q
01
2Q
02
4Q
02
2Q
03
4Q
03
2Q
04
4Q
04
2Q
05
4Q
05
2Q
06
4Q
06
2Q
07
4Q
07
2Q
08
4Q
08
2Q
09
4Q
09
2Q
10
4Q
10
2Q
11
4Q
11
2Q
12
4Q
12
2Q
13
4Q
13
Computer Communication ConsumerOther/Industrial Memory
Wafer Revenue (NT$)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse
■ Capex should grow into next year. UMC guided US$1.1-1.3 bn for capex in 2014
though may start ordering in 2H14 for additional 28nm capacity for 2015. We expect
the company to ramp up from current 12K WPM toward 25-20K, requiring US$1.5-$2
bn capex. The company's 28nm investment cycle could take capex back slightly
above FCF during the investment phase.
UMC 2Q14 sales in line with
expectations
15 July 2014
Asia Semiconductor Sector 13
■ Maintain NEUTRAL. We maintain our 2014/2015 EPS estimates of NT$0.81/NT$0.92
and our target price of NT$14, based on 0.8x forward P/B vs 0.6-1.0x post-crisis
range. While near-term is moving to the high end of that range supported by seasonal
ramp and improving profitability, we keep UMC NEUTRAL due to slow migration to
advanced technology and rising technology challenges. We would see risk of a
pullback as well as tight supply eases later in 3Q14 into 4Q14 into the low season.
Figure 30: UMC has a slightly negative FCFs Figure 31: UMC trading at high end of its post crisis range
-10%
-5%
0%
5%
10%
15%
20%
25%
-40,000
-20,000
0
20,000
40,000
60,000
80,000
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3E
201
4E
201
5E
Operating Cash Flow Capex FCF Yield
Cash flow/Capex NT$mn FCF Yield (%)Cash flow/Capex NT$mn FCF Yield (%)
0.6x
0.8x
1x
1.4x
5
10
15
20
25
30
Jan/03 Apr/04 Jul/05 Oct/06 Jan/08 Apr/09 Jul/10 Oct/11 Jan/13 Apr/14
(NT$)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 32: UMC operating metrics NT$mn 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E 3Q14E 4Q14E 2012 2013E 2014E 2015E 2016E
Capacity (8" equivalent WPM) 1,461 1,537 1,548 1,560 1,562 1,600 1,629 1,634 5,513 6,106 6,425 6,947 7,552
Sequential change (%) 4% 5% 1% 1% 0% 2% 2% 0% 4% 11% 5% 8% 9%
Shipment (8" equivalent WPM) 1,125 1,307 1,329 1,236 1,258 1,422 1,486 1,358 4,306 4,998 5,524 5,952 6,370
Sequential change (%) 5% 16% 2% -7% 2% 13% 5% -9% 2% 16% 11% 8% 7%
Utilization rate (%) 77% 85% 86% 79% 81% 89% 91% 83% 78% 82% 86% 86% 84%
ASP (US$) 785 773 794 778 749 749 752 749 833 783 750 751 749
Sequential change (%) -7% -2% 3% -2% -4% 0% 0% 0% -3% -6% -4% 0% 0%
FX rate 29.8 30.0 29.9 29.9 30.5 30.5 30.5 30.5 29.6 29.9 30.5 30.5 30.5
Other Revenue 1,435 1,611 1,834 2,164 2,999 3,005 3,155 3,218 - 7,044 12,378 13,281 13,956
Total Revenue (NT$mn) 27,781 31,905 33,407 30,879 31,694 35,470 37,243 34,239 105,998 123,972 138,646 149,638 159,473
Revenue % of 90nm&below 56% 57% 60% 60% 58% 59% 59% 60% 59% 58% 65% 54% 0%
Capex (US$mn) 241 266 335 260 206 361 371 262 1,718 1,101 1,200 1,300 1,400
Capex/revenue (%) 26% 25% 30% 25% 20% 31% 30% 23% 48% 27% 26% 26% 27%
Revenue (NT$mn) 27,781 31,905 33,407 30,719 31,694 35,470 37,243 34,239 115,675 123,812 138,646 149,638 159,473
EPS (NT$) 0.52 0.15 0.28 0.06 0.09 0.25 0.35 0.12 0.49 1.01 0.81 0.92 1.01
Gross margin (%) 16% 19% 22% 18% 19% 24% 25% 20% 17% 19% 22% 21% 21%
Operating margin (%) 1% 4% 7% 1% 3% 9% 10% 4% 1% 3% 7% 7% 8% Source: Company data, Credit Suisse estimates
Vanguard: 2Q14 sales at the high end; acquired fab
dilution looks manageable
Earnings details: 4 Aug 2PM HK time
Figure 33: Credit Suisse versus Street estimates for 2Q14/3Q14/4Q14 and 2014-2015 In NT$ mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales 5,768 5,731 Ship +1-3% 6,546 6,221 6,501 6,153 24,322 23,666 27,879 26,853 30,597 28,093
QoQ (%) 4.7% 4.1% ASPs +1-3% 13.5% 7.9% -0.7% -1.1% 15.1% 12.0% 14.6% 13.5% 9.8% 4.6%
GM (%) 38.3% 38.0% 37-39% 35.8% 36.3% 35.7% 35.7% 36.7% 36.6% 37.2% 35.9% 38.3%
OpM (%) 28.5% 27.7% Util: >100% 25.9% 26.3% 25.5% 25.8% 26.7% 26.6% 27.4% 26.7% 28.5%
Net Inc: 1,437 1,385 1,484 1,385 1,443 1,353 5,706 5,495 6,654 6,259 7,603 6,822
EPS (NT$) 0.91 0.85 0.94 0.86 0.91 0.83 3.60 3.35 4.20 3.71 4.80 3.94
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Vanguard sales and track to
the higher-end of guidance
15 July 2014
Asia Semiconductor Sector 14
■ 2Q14 reaches the high end of its guidance. Vanguard 2Q14 sales reached NT$5.8
bn, +5.7% QoQ, above CS/Street +4.7%/+4.1% QoQ and guidance for shipments and
ASPs both up 1-3% QoQ, driven by power management IC. However, large panel ICs
mix declined due to continued inventory adjustments after the 1Q14 pull-ins. Small
panels were flat in the quarter but impacted by capacity constraints that drove
management to allocate mix to higher-margin products.
■ Margins could reach the high end of guidance, but higher tax may keep EPS in
line. Due to mix shift to power management and utilisation staying over 100%, we
expect GM to reach higher-end of 37-39% guidance and in the range of our 38.3%
GM. We estimate OpM at 28.5%, above street at 27.7%, but offset by higher corporate
tax of 20% due to retained earnings tax to keep EPS in line.
Figure 34: Nanya fab accretive to earnings
No New Capacity New Fab
2012 2013 2014E 2015E 2012 2013 2014E 2015E
Capacity 1686.0 1626.0 1671.0 1671.0 Capacity 1686.0 1626.0 1851.0 2070.0
Shipments 1328.4 1632.1 1770.0 1787.7 Shipments 1328.4 1632.1 1857.2 2058.1
Utilization 79% 100% 106% 107% Utilization 79% 100% 100% 99%
ASP $437 $436 $428 $440 ASP $437 $436 $434 $449
Forex 29.6 29.7 30.2 30.2 Forex 29.6 29.7 30.2 30.2
Revenue 17,174 21,134 22,839 23,755 Revenue 17,174 21,134 24,322 27,879
Y/Y Growth 13% 23% 8% 4% Y/Y Growth 13% 23% 15% 15%
Depreciation -3,465 -2,274 -$2,000 -$1,826 Depreciation -3,465 -2,274 -2,100 -2400
Per Wafer Cost 7.2 7.2 7.1 7.2 Per Wafer Cost 7.2 7.2 7.2 7.3
Non Depr COGS -9,626 -11,673 -12,644 -12,943 Non Depr COGS -9,626 -11,673 -13,298 -15,117
Total COGS -13,092 -13,946 -14,644 -14,769 Total COGS -13,092 -13,946 -15,397 -17,517
Gross Profit 4,083 7,187 8,194 8,986 Gross Profit 4,083 7,187 8,925 10,362
GM% 23.8% 34.0% 35.9% 37.8% GM% 23.8% 34.0% 36.7% 37.2%
Net Income 2,346 4,695 5,170 5,689 Net Income 2,346 4,695 5,706 6,653
EPS $1.49 $2.98 $3.26 $3.59 EPS $1.49 $2.98 $3.60 $4.20
Shares 1,575.5 1,573.2 1,584.0 1,584.0 Shares 1,575.5 1,573.2 1,584.0 1,584.0 Source: Company data, Credit Suisse estimates
■ Nanya fab dilutes margins in 3Q14, but should improve from that level. The
acquired Nanya fab will add 30k capacity and 18k shipments at 60% utilisation starting
in 3Q14, adding 12-13% growth off Vanguard's current 140K WPM capacity albeit at
lower ASPs than Vanguard's mix. We still factor close to 300 bp GM decline in 3Q14
as the company takes on the weaker product mix. Nanya had booked an NT$361 mn
operating loss on that fab in 1Q14. Vanguard's customer qualification normally takes
two quarters, but it has started the fab 3 qualification work in 2Q14 and expects to also
use that facility for debottleneck tool use even ahead of bringing in new products in
4Q14. The company views no material negative profit impact for the full year and
expects 3Q14 dilution to be offset by new product qualification in 4Q14.
■ 3Q14 outlook stable. 3Q14 will be a high season and the company views
supply/demand balanced, with no slowdown from both large and small panel. We
expect further mix shift to higher margin power management and also higher utilisation
to help outset some of the Nanya fab drag. Growth drivers to fill the fab include 8%
driver IC unit CAGR, power IC/audio codec for Apple, diversified analog IDMs, and
longer-term potential for touch integrated driver and fingerprint ICs. We estimate 3Q14
sales to grow 12.4% QoQ vs street 6.8% QoQ and GM at 35.8% vs street's 36.3%.
15 July 2014
Asia Semiconductor Sector 15
Figure 35: Rising power management lifts margins Figure 36: High free cash flows allows for a rising DPS
$0
$400
$800
$1,200
$1,600
$2,000
$2,400
$2,8003Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14E
3Q
14E
4Q
14E
Driver IC (Large) Driver IC (Small)
Analog+Power management Others
Quarterly sales (NT$mn)
-10%
-5%
0%
5%
10%
15%
20%
0
2,000
4,000
6,000
8,000
10,000
12,000
CY
04
CY
05
CY
06
CY
07
CY
08
CY
09
CY
10
CY
11
CY
12
CY
13
CY
14
CY
15
Op Cash Flow Capex FCF Yield
Dividend Yield Linear (FCF Yield)
OP CF / Capex (NT$mn) Dividend / FCF Yield (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ 2014 outlook solid. We estimate the Nanya fab will give Vanguard a EPS lift in
2014/2015 from NT$3.26/NT$3.59 to NT$3.60/NT$4.20 as 2H14 growth is no longer
capped and the company can now achieve 10% additional growth off 2H14 with flat
depreciation/sales to allow stable GMs. (Please see Exhibit 4) The company may
need to look for another fab by late 2015 due to relatively small scale of this fab.
■ Maintain NEUTRAL. We maintain our NT$50 target price based on 14x 2014 and 12x
2015 and up-cycle range of 2.6x P/B, high end of its 0.7-2.6x range. Vanguard is
trading at 2.4x P/B and 12.8x P/E, factoring in a full fab scenario allowing NT$4.20 of
earnings power next year.
Figure 37: Vanguard’s stock has pulled back from its recent highs
0.75x
1.6x
2.3x
2.9x
5
10
15
20
25
30
35
40
45
50
55
Dec/0
3
Dec/0
4
Dec/0
5
Dec/0
6
Dec/0
7
Dec/0
8
Dec/0
9
Dec/1
0
Dec/1
1
Dec/1
2
Dec/1
3
Dec/1
4
NT$ Vanguard PB Band
Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 16
Figure 38: Vanguard operating metrics 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013E 2014E 2015E 2016E
Capacity (8" equivalent) 411 423 513 504 513 522 522 513 1,551 1,686 1,626 1,851 2,070 2,166
Sequential Change 1% 3% 21% -2% 2% 2% 0% -2% 11% 9% -4% 14% 12% 5%
Shipment (8" equivalent) 428 436 498 495 482 512 536 529 1,156 1,328 1,632 1,857 2,058 2,240
Sequential Change 4% 2% 14% -1% -3% 6% 5% -1% 0% 15% 23% 14% 11% 9%
Utilization rate 104% 103% 97% 98% 94% 98% 103% 103% 75% 79% 100% 100% 99% 103%
ASP $427 $438 $435 $435 $440 $445 $451 $457 $448 $437 $436 $434 $449 $452
Sequential Change -4% 3% -1% 0% 1% 1% 1% 1% 2% -2% 0% 0% 3% 1%
Wafer Revenue (US$mn) 183 191 217 215 212 228 242 242 518 580 711 806 923 1,013
FX rate 30.1 30.2 30.2 30.2 30.2 30.2 30.2 30.2 31.0 29.6 29.7 30.2 30.2 30.2
Other Revenue - - - - - - - - - - - - - -
Total Revenue (NT$mn) 5,507 5,768 6,546 6,501 6,403 6,883 7,296 7,296 15,191 17,174 21,134 24,321 27,879 30,597
Capex (US$mn) $15 $8 $67 $36 $7 $7 $7 $7 $90 $46 $32 $126 $30 $40
Capex/revenue 8% 4% 31% 17% 4% 3% 3% 3% 18% 8% 5% 16% 3% 4%
Revenue 5,507 5,768 6,546 6,501 6,403 6,883 7,296 7,296 15,190 17,175 21,135 24,322 27,879 30,597
EPS 0.85 0.91 0.94 0.91 0.84 1.03 1.18 1.15 0.53 1.48 2.78 3.60 4.20 4.80
Gross Margin 37% 38% 36% 36% 34% 37% 39% 39% 15% 24% 32% 37% 37% 38%
Operating Margin 27% 29% 26% 25% 24% 27% 29% 29% 6% 14% 23% 27% 27% 29% Source: Company data, Credit Suisse estimates
SMIC: Specialty and 40nm ramp driving continued
growth in 2014
Earnings details: 7 Aug 8:30AM HK time
Figure 39: SMIC 2Q14/3Q14/4Q14 and 2014-2016 estimates vs street summary In US$ mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Net sales $519 $529 $505-519mn $586 $596 $610 $588 $2,166 $2,166 $2,404 $2,460 $2,613 $2,679
Change 15.0% 17.3% +12 to 15%
QoQ
13.0% 14.9% 4.0% -1.4% 4.7% 4.7% 11.0% 13.6% 8.7% 8.9%
GM % 23.6% 22.8% 22-24% 24.2% 24.6% 23.9% 24.5% 23.4% 22.9% 23.9% 24.2% 24.5% 25.2%
OpM % 7.6% 8.1% Opex $89-
93mn
9.6% 10.2% 9.6% 9.6% 8.5% 8.1% 8.8% 9.0% 9.4% 9.7%
Net income 34 39 49 52 51 46 156 151 183 195 213 219
EPS (US$) $0.001 $0.013 $0.001 $0.029 $0.001 $0.020 $0.004 $0.004 $0.005 $0.006 $0.006 $0.079
ADR EPS
(US$)
$0.05 $0.65 $0.07 $1.45 $0.07 $1.00 $0.22 $0.20 $0.25 $0.30 $0.29 $3.95
HK EPS (HK$) $0.007 $0.101 $0.010 $0.22 $0.011 $0.16 $0.034 $0.03 $0.039 $0.05 $0.045 $0.61
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service
■ 2Q14 tracking well; no major impact from BRCM's baseband exit. We estimate
2Q14 to reach high end of guidance of +12-15% QoQ due to broad-based rebound
across communications and specialty also consistent with overall foundry/back-end
upside in 2Q14. We do not see impact from 10-15% customer BRCM's baseband
exit/sale as SMIC is mainly supplying 40nm/65nm set-top and connectivity.
■ 3Q14 sales tracking to moderate growth – CS slightly below street. We estimate
3Q14 sales +13% QoQ, slightly below street +15% QoQ as the company has still a
modest customer base and limited capacity for 40nm. We believe the company will
continue to focus on optimising profitability and should have GMs trend toward mid-
20% level in 3Q14.
■ SMIC and QCOM announced 28nm production in China for 2015. SMIC and
Qualcomm announced on 3 July to work together on 28nm PolySiON and HKMG
process technology and manufacturing for Qualcomm's Snapdragon processors for
smartphones. Previously, SMIC has supported Qualcomm on power management,
wireless and connectivity related ICs at various process nodes and we estimate their
top customer last year at 21% of sales. SMIC also targets to extend its technology
1Q14 tracking to high end of
its 12-15% QoQ guidance
15 July 2014
Asia Semiconductor Sector 17
offerings on 3DIC and RF front-end wafer manufacturing to support continued
expansion of Snapdragon's product portfolio.
■ Consistent with our expectations and a modest portion of the TAM, though a
negative for sentiment for TSMC/UMC. We have noted our expectations in our
Taiwan Daily for a SMIC announcement on QCOM for 28nm, as SMIC has been a
long-time supplier for power management on 0.18um and also fits into QCOM’s
strategy of lowering costs and manufacturing in China for the China market and helps
politically in China to localize some of its manufacturing there. We expect negative
market sentiment on TSMC and a lesser extent UMC on SMIC's headline customer on
28nm though volume would start small from 2015 as SMIC's capacity would reach 6k
in Beijing + 1-2K R&D line in Shanghai by end of this year, keeping its share of
Qualcomm's leading edge baseband business to under 10% in the initial year. We
expect initial revenue by 1Q15 and ramping to 8% by 4Q15. Qualcomm should play an
important role helping SMIC get more competitive on its 28nm process for 2nd
wave
business and also to attract other overseas and Chinese design houses.
■ Foundry supply tightness suggests inventory build. We note that foundry lead
times have stretched out so foundries are rescheduling orders from 3Q14 into 4Q14.
While the upside appears decent now, chip companies usually respond to longer lead
times by over-ordering when they are more concerned with supply than demand. We
see strong 2Q14 results and 3Q14 guidance but may see adjustments from 4Q14 as
inventory already built coming out of 1Q and may build again exiting 2Q. We believe
foundry customers are booking out orders now into early 4Q14 as foundry capacity is
approaching full across all the top foundries.
Figure 40: 28nm ramp only starting from late 2014 Figure 41: China fabless companies driving SMIC growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14E
3Q
14E
4Q
14E
28nm 40nm 65nm 90nm 0.13um 0.15um 0.18um 0.25um 0.35um
$0
$50
$100
$150
$200
$250
$300
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
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10
1Q
11
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11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14E
3Q
14E
4Q
14E
US$mn
North America China Eurasia Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ SMIC raises US$391mn capital via new share issuance and CB. SMIC announced
on 4 June that it will raise capital through issuance of (1) 2.59 bn new shares (8% of
current outstanding shares) at HK$0.60 per share (5% discount to close) targeted to
complete on 9 June 2014, (2) US$95 mn zero couple convertible bonds, convertible at
the price of HK$0.8 for 925 bn shares due Nov 2018 (4% dilution) and (3) rights
issuance to its large shareholders (3% dilution) for US$100 mn. Total net proceeds
would be US$391.4 mn. The new securities issuance is triggering the exercise of pre-
emptive rights by Datang and Country Hill to purchase a pro rata portion of the new
shares to avoid dilution and maintain their ownership will stay at 18% and 10%
respectively. The total dilution for equity and assuming conversion would approximate
15% additional shares.
SMIC raising US$391mn
capital for its Beijing 12" fab
15 July 2014
Asia Semiconductor Sector 18
Figure 42: SMIC diluting up to 15% with its convert/equity issuance
Instruments (US$mn) Shares Price (HK$) Valuation Dilution
Existing shares 32,232 $0.63 $2,620.1
Equity issuance 2,590 $0.60 $201.4 8.0%
Datang & Country Hill rights issuance 1,294 $0.60 $100.2 4.0%
Convertibles (US$mn) 925 $0.80 $95.5 2.9%
Gross proceeds (US$mn) $397.1
Net proceeds (US$mn) $391.4 14.9% Source: Company data, Credit Suisse estimates
■ Fund raising to support the Beijing Fab build-out. SMIC needs funding to support
its long-term capex expansion and 12" fab build-out in Beijing, one of the triggers
when we downgraded last 10 June that could require a new investment cycle. SMIC
has US$736 mn cash and financial assets and US$1.2bn debt so can fund current
year's capex from operating cash flows but would need funds for the next couple
year's 8" and 12" capacity expansion.
SMIC last year entered a 55/45 JV with ZDG and BIDIMC (Beijing government owned)
to build a 40nm/28nm fab with monthly capacity of 35,000 wafers. SMIC will own 55%
stake and invest US$2 bn of US$3.6 bn from 2014-17, with JV revenue consolidated
but SMIC only retaining 55% share of the profits. SMIC targets initial build in 2014 to
be 6K WPM in 2014, followed by an additional 4K in 2015 and the eventually targeting
to ramp to 35K WPM over the next three years.
Figure 43: Beijing JV spending ramps the next few years
2012 2013 2014 2015
Beijing JV capex - - -$570 -$900
Foundry Core capex -$499 -$650 -$441 -$450
Dormitory capex -$120 -$110
SMIC reported capex -$499 -$770 -$1,110 -$1,350
Cash flow capex (SMIC's portion) -$417 -$650 -$865 -$945
Operating cash flow $454 $738 $694 $830
Free cash flow $37 $88 -$171 -$115 Source: Company data, Credit Suisse estimates
■ Maintain NEUTRAL— near-term sales upside and China policy support balances
the dilution hit and late year inventory risk. We recently raised 2014/2015E net
profit from US$150/US$175 mn to US$156/US$183 mn vs street of US$158/US$192
mn. We kept our target price at HK$0.73 based on 1.25x forward P/B and maintain
NEUTRAL. We balance dilution and late year inventory risk with near-term catalysts
from business upside and potential China policy support.
Figure 44: FCF remains near break-even for SMIC Figure 45: SMIC stock now trading at 1.2x 2014 P/B
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14F
20
15F
Operating cash flow Capital spending FCF
US$mn
0.4x
0.7x
1.2x
1.5x
0
0.5
1
1.5
2
2.5
Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14
HK$ SMIC PB Band
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse
15 July 2014
Asia Semiconductor Sector 19
Figure 46: SMIC operating metrics 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E 3Q14E 4Q14E 2013 2014E 2015E 2016E 2017E
Capacity (8" equivalent) 659 670 695 702 731 734 743 770 2,726 2,976 3,339 3,662 4,025
Sequential Change (%) 0% 2% 4% 1% 4% 0% 1% 4% 13% 9% 12% 10% 10%
Shipment (8" equivalent) 630 684 653 602 582 653 745 783 2,568 2,762 3,072 3,378 3,724
Sequential Change (%) 4% 9% -5% -8% -3% 12% 14% 5% 16% 8% 11% 10% 10%
Utilization (Shipments/Capacity) 96% 102% 94% 86% 80% 89% 100% 102% 94% 93% 92% 92% 93%
Logic ASP $750 $761 $767 $762 $724 $741 $734 $727 $760 $731 $730 $722 $713
Sequential Change (%) 0% 2% 1% -1% -5% 2% -1% -1% 5% -4% 0% -1% -1%
Simple ASP (Revenue/Shipments) $797 $791 $818 $817 $776 $795 $787 $779 $760 $731 $730 $722 $713
Sequential Change (%) 0% -1% 3% 0% -5% 2% -1% -1% 5% -4% 0% -1% -1%
Capex (US$mn) (Management) $185 $302 $169 $114 $108 $410 $302 $290 $770 $1,110 $1,350 $1,400 $1,500
Capex (US$mn) (Cash Flows) $123 $188 $256 $83 $108 $410 $302 $290 $650 $1,110 $1,350 $1,400 $1,320
Capex/revenue (%) 26% 36% 51% 18% 26% 85% 55% 51% 33% 55% 60% 57% 50%
Revenue $502 $541 $534 $492 $451 $519 $586 $610 $2,069 $2,166 $2,404 $2,613 $2,847
EPS $0.03 $0.07 $0.05 $0.01 $0.03 $0.05 $0.07 $0.07 $0.16 $0.21 $0.25 $0.29 $0.31
Gross Margin (%) 20% 25% 21% 19% 21% 24% 24% 24% 21% 23% 24% 25% 24%
Operating Margin (%) 6% 9% 8% 2% 7% 8% 10% 10% 6% 8% 9% 9% 9%
Depreciation/Wafer $202 $158 $194 $188 $191 $171 $169 $174
Non Depreciation/Wafer $438 $433 $451 $473 $418 $435 $426 $417 Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 20
Backend: Business drivers shift in 2H14 We recently revised up estimates on ASE, SPIL and Powertech to reflect 2Q14 sales
upside and decent outlook into 3Q14. The back-end business was supported by non-
Apple related drivers in 1H14 including PC stabilisation, consumer/TV builds, and low cost
smartphones but will shift to the Apple ramp, game console and 4G LTE in 2H14. The
group topped 2Q14 guidance though has noted upward revisions to rolling forecasts now
moderating and stable the past month.
We still expect reasonable growth in 3Q14, with incremental momentum for ASE relative
to the group due to its 2H weighted SiP builds for fingerprint and wearables. ASE and
SPIL are gaining market share, with ASE adding fingerprint IC module assembly in 2H13
and one of Apple’s 3 processor back-end suppliers in 2014 and SPIL seeing two year
penetration into a major flip chip customer and having high of sales to China/Taiwan
fabless in low cost smartphones and tablets.
Figure 47: ASE and SPIL have gained market share Figure 48: Back-end trading above mid-cycle P/B
0.30
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14E
TSMC UMC SMIC Vanguard ASE SPIL Amkor
Indexed Revenue
-40
-20
0
20
40
60
80
100
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
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2
Aug
-02
Ma
r-0
3
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03
Ma
y-04
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4
Jul-0
5
Fe
b-0
6
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-06
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7
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-09
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b-1
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Sep
-13
Apr-
14
SPIL PB premium ASE SPIL
PB (x) %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ ASE supported by SiP project ramps. ASE 2Q14 ATM sales reached NT$29.3 bn,
+14.3% QoQ, above CS and guidance +10% QoQ, driven by communications and
IDMs. Due to tighter capacity (wirebond was at full 85-90% utilisation and FC/test at
80%), we recently raised our GM estimates from 20.3% to 21.2%, above
guidance/street of 20%. We also increase OpM from 11.1% to 12%, taking EPS from
NT$0.56 to NT$0.65, above street NT$0.59. 2Q14 consolidated sales came in line
with our estimates at NT$58.6bn, +7.2% QoQ, despite weaker USI, down 9.5% QoQ,
as the Apple-related ramp is more timed to 2H14.
We believe rolling forecasts are stabilising after several months of increases on
inventory restocking. Despite that, the company has good visibility for strength due to
Apple's refresh, ramp of LTE in China and better macro lifting broad based IDMs (30-
35% of sales). ASE noted at its AGM that it expects capacity full through 3Q14, driven
by good SiP momentum and recovery of output from K7. We model ASE IC ATM
3Q14 up high single digit QoQ and 4Q14 up low single QoQ and EMS could up
25/45% in 3Q14/4Q14.
■ SPIL revenue drivers shifting into 2H14. 2Q14 sales reached NT$21.9bn, +21.4%
QoQ, above guidance for +11-15% QoQ and CS/Street +13.5%. Better 2Q14 sales
were driven by strength from communications (Taiwan and overseas) with strong 3G &
4G baseband demand, China networking momentum due to 4G LTE build, and initial
pickup of Apple-related PMIC, while game console and PC were more mild. We
expect rotation of strength between SPIL's revenue drivers into 2H14. We expect pick-
up from overseas baseband, power mgmt. and game console and moderation in local
customers after the strong 1H14 ramp. We lift our 3Q13 sales from +5% QoQ to
15 July 2014
Asia Semiconductor Sector 21
+7.5% QoQ and GMs from 25.1% to 27.2%. We now model 7% QoQ decline in 4Q14
after the strong momentum.
Figure 49: Credit Suisse and street expectations for 2Q14/3Q14/4Q14 and 2014/2015 In NT$ mn, unless otherwise stated
Back-end 2Q14 3Q14 4Q14 2014 2015
(NT$ mn) CS Street CS Street CS Street CS Street CS Street
ASE Con. sales 58,616 57,947 66,202 67,532 78,347 75,453 257,865 256,225 292,368 293,437
Growth 7.2 5.9 12.9 15.2 18.3 11.7 17.3 16.5 13.4 13.8
Operating Profit 7,012 7,886 9,122 29,091 33,345
ASE ATM sales 39,266 57,947 42,015 67,532 43,275 158,907 256,225 175,325 332,153
Growth 14.3% 5.9% 7.0% 15.2% 3.0% 10.9% 16.5% 10.3% 13.2%
Operating Profit 6,338 7,293 7,781 25,622 28,482
GM% 26.7% 20.3% 27.7% 20.2% 28.3% 18.8% 26.8% 19.6% 26.9% 19.6%
OpM% 16.1% 10.7% 17.4% 11.2% 18.0% 10.4% 16.1% 10.5% 16.2% 10.5%
Net income 5,044 4,636 5,775 5,758 6,793 6,100 21,050 20,187 24,571 24,124
EPS (NT$) 0.65 0.60 0.74 0.74 0.87 0.78 2.70 2.58 3.15 3.05
SPIL sales 21,928 20,737 23,573 22,105 21,932 20,941 85,493 88,287 91,622 95,688
Growth 21.4% 14.8% 7.5% 0.8% -7.0% -5.3% 23.3% 36.6% 7.2% 8.4%
Operating Profit 3,972 4,609 3,430 14,402 15,607
GM% 26.2% 24.5% 27.2% 25.0% 23.9% 23.7% 25.0% 24.1% 25.3% 23.6%
OpM% 18.1% 15.5% 19.6% 16.4% 15.6% 14.9% 16.8% 15.6% 17.0% 16.1%
Net income 3,367 2,749 3,869 2,989 2,902 2,571 12,229 11,303 13,156 12,538
EPS (NT$) 1.09 0.90 1.25 0.96 0.94 0.82 3.95 3.66 4.25 4.02
Powertech sales 10,580 10,308 11,109 10,992 11,109 10,413 42,024 41,162 45,190 44,803
Growth 14.7 11.7 5.0 3.9 0.0 -5.3 11.8 9.5 7.5 8.8
Operating Profit 1,087 1,192 1,165 4,180 4,780
Net income 715 721 807 867 785 779 2,904 2,990 3,249 3,540
EPS (NT$) 0.94 0.90 1.06 1.11 1.03 0.99 3.80 3.71 4.25 4.29 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ Amkor also should match its Taiwan peers with upside. We expect AMKR to
report its 2Q14 revenue above CS/Street estimates of $762mn (+9.5% QoQ)/$761 mn
(+9.4% QoQ) and above the mid-point of the Company's guidance calling for $735 mn
to $785 mn (implies +5.6% to +12.8% QoQ) and above normal seasonal of up 8.4%
QoQ as we are seeing low supply chain inventory drive better restocking across most
of the upstream. Early 20nm strength could be an offsetting factor and drive above
expected growth into 2H14.
We expect AMKR to guide 3Q14 revenue in line with CS/Street estimates of $853 mn
(+12% QoQ)/$827 mn (+8.6% QoQ) – the five-year (excluding 2009) mean/median
sequential revenue growth rates are +4.5%/+4.5% QoQ in C3Q. We expect: (1) the
continued ramp of 20nm mobile design wins including AAPL, (2) the fingerprint design
win the company mentioned during its 4Q13 and 1Q14 earnings conference call (while
the company did not specify the exact details, we think leverage to Samsung's Galaxy
S5) to support the expected sequential growth during the Sep quarter.
■ Powertech upside in 2Q14, some growth drivers to continue in 2H14. Powertech
2Q14 sales reached NT$10.6 bn, +14.7% QoQ and above CS /Street of 12.0%/11.7%
QoQ growth, but in line with our latest expectations. We believe sales upside is
coming from commodity and mobile DRAM, with sales mix split pretty evenly with
DRAM and NAND each about 35% and logic 30%. We expect higher sales and rising
utilisation (assembly at 90%, test above 80%) to lift GM above company guidance for
15%+ and our 15.6%.
15 July 2014
Asia Semiconductor Sector 22
We model +5% QoQ growth off the higher 2Q14 sales base in 3Q14. The company
has several growth drivers: (1) mobile DRAM ramping with flagship models, with
models converting from LPDDR2 to LPDDR3 also requiring high speed test, an area
of lower utilisation for Powertech, (2) GDDR5 output ramping up for the Sony game
console, (3) additional supply coming from late 3Q14 from Toshiba Fab 5 Phase 2, (4)
more product for eMC:DP/eMMC paired with Kingston, which is seeing 50% volume
growth in this area YoY, and (5) steady growth from Greatek and advanced logic
where the company has qualified US customer for bumping and a local Taiwan and
China fabless
Back-end sector fundamentals have been positive
though approaching a momentum peak
Back-end test and packaging suppliers ASE and SPIL have seen improving fundamentals
the past year as the sector stayed conservative on capex until recently, saw a margin uplift
from better costs, product mix and firming pricing and growth from incremental product
drivers. ASE and Amkor both have notable incremental growth driver from the fingerprint
sensor and Apple processor orders in 2014. SPIL also has another year of growth
penetrating an overseas mobile customer, a base station/baseband customer in China and
ramping full year of game console orders.
After strong outperformance, we would note potential for short-term corrections in the
stocks from reversals in order momentum triggered by seasonal build peak, inventory shift
from restocking to destocking and slowdown in equipment orders after the recent surge.
The back-end companies have noted a slowing of upward revisions, though with capacity
tight and some product drivers into 3Q14 are not seeing order cuts.
Back-end bookings may push past last year’s peak
levels
According to the Semi back-end book-to-bill data, industry equipment bookings for new
capacity through May have rebounded to last year’s booking peak of US$286mn/month
and also are approaching the average industry bookings levels where stock prices
traditionally have a cyclical peak. Due to better macro, stabilising PCs, Apple replacement
cycle and China LTE, bookings may ultimately pass last year’s highs as the industry
supply adds to meet the improving demand drivers. While rising inventory and capacity
additions are rising risks, next catalyst is still a likely beat and raise result for the company
and its upstream peers along with coming Apple product refresh, which could continue to
support the shares.
Figure 50: Back-end bookings close to last stock peak Figure 51: Back-end bookings close to last stock peak
Current Month May-14 Apr-14 MoM
Current bookings $286 $247 15.4%
Bookings vs. Hi/Lo/Avg Current Hi/Lo/Avg +/-
Bookings vs. last trough $286 $104 174.0%
Bookings vs. last peak $286 $288 -0.8%
Bookings vs. post crisis avg $286 $203 40.4%
Stock peak level ASE SPIL
Current bookings $286 $286
Last peak: $152 $200
Current to last peak: 88% 43%
Current bookings $286 $286
Average peak: $297 $308
Current to average peak: -4% -7% Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates
■ Aggressive Capex for the back-end and rising inventory pose risks later in the
year. ASE management noted potential to further raise capex from 1Q14's view of
US$900-950mn and will continue to invest next year. Although ASE still views semi
industry capacity expansion disciplined, we note that the 5 leading back-end players
have revised up Capex by 44% since the start of the year, taking full year capex +22%
YoY. A risk for the whole group is supply growth accelerates just as broader-based
inventory adjustments come in from late 3Q14 into 4Q14.
ASE and SPIL share
increasing and benefiting
from better supply control
and lower material costs
Industry equipment orders
are approaching cycle peak
15 July 2014
Asia Semiconductor Sector 23
Figure 52: Back-end equipment orders rising in millions, unless otherwise stated
Figure 53: Back-end capex up 44% YTD and +22% YoY in US$ millions, unless otherwise stated
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Equipment Bookings (US$ mn)
Stock Price
BE Bookings ASE Stock Price SPIL Stock Price
Capex (US$mn) 2013 2014 orig 1Q14 view Current view YoY (%) Revision %
ASE $668 $700 $900-950 $1,000+ 50% 43%
SPIL $503 $323 $490 $600 19% 86%
Amkor $567 $450 $575 $575 1% 28%
Powertech $267 $233 $267-300 $267-300 6% 28%
King Yuan $166 $133 $167 $200 21% 50%
Total $2,171 $1,840 $2,465 $2,659 22% 44%
YoY (%) -15% 14% 22%
Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates
Profitability: GMs back to pre-crisis levels
The back-end has moved past its challenges with rising material costs from the increase in
gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has
been progressively ramping up copper to over 70% of sales, with ASE over 60% due to
larger base of IDM business that are in less cost sensitive applications. The companies
have now eased burden of gold cost and improved mix of flip chip and test and used a
relatively sustained upturn for the past few years to restore margins.
Figure 54: ASE margins back to 2010 levels Figure 55: SPIL margins also on a rebounding trend
5%
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GM%Utilization %
Assembly utilization Gross margin
0%
5%
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15%
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25%
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35%
35%
45%
55%
65%
75%
85%
95%
105%
2Q
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Gross marginUtilization %
Assembly utilization Gross margin Linear (Test utilization)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Inventory needs to be monitored in the coming
months
Inventory rebuilt in 1Q14, with total tech inventory up 5 days to 42 days, above the normal
3 day build and 1 day above the 10-year average for 1Q. Semiconductor inventory also
built 4 days to 73 days, above the normal 2 days build and 72 day 10-year average for 1Q.
Excluding Intel, semiconductor days increased 6 days to 74 days, above the normal 4-day
build and historical average of 71 days. Our database of 90 Taiwan corporates showed an
increase from 35 days to 43 days, now 7 days above the 36-day average from 2005 to
2013. The Taiwan chain saw an inventory build across every sub-sector, with builds most
notable in handset related (+11 days QoQ), Hon Hai (+11 days QoQ), components (+9
days QoQ) and IC design (+18 days QoQ).
GM has improved as gold
costs drop
Inventory level rebuilding
15 July 2014
Asia Semiconductor Sector 24
Figure 56: Taiwan inventory started to build in 1Q14 Figure 57: Fabless and Semis building inventory in 1Q14
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Inventory days
Fabless IC Total Downstream Total Taiwan Chain
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Inventory Days
Fabless IDMs (hybrid) Foundry Customers Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
The over-build in upstream relative to downstream repeated in 2011, 2012 and 2013, with
foundry and back-end significantly outgrowing the downstream in 1H but correcting more
in 2H as noted by the table below. We note that upstream sales in 1Q14 declined only
4.3% vs 11% decline in downstream units, and guidance for 2Q14 reflects 17.1% growth
outpacing the 4.9% growth fo0072 downstream. We believe this trend is becoming an
increasingly seasonal event following robust guidance for the foundry and back-end,
potentially triggering another slowdown in orders later in 2H14.
Figure 58: Backend valuation comp Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales)
Company Ticker 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015
Select backend peers
Amkor AMKR $11.11 $2,628 1.2 1.2 1.1 5.6 5.0 4.8 21.1 15.3 13.6 2.3 2.1 1.8 12.5 15.2 14.5
ASE 2311.TW $39.40 $10,147 1.6 1.3 1.1 7.3 6.3 5.5 17.2 14.6 12.5 2.5 2.3 2.1 14.4 15.5 16.6
SPIL 2325.TW $49.80 $5,131 2.3 1.9 1.7 8.2 5.8 5.2 22.9 12.6 11.7 2.5 2.2 2.1 10.9 17.4 18.0
Chipbond 6147.TWO $51.90 $1,104 2.4 2.1 1.7 7.4 6.1 5.0 12.6 13.4 10.2 1.4 1.5 1.4 11.4 11.0 13.5
ChipMOS 8150.TW $40.80 $1,175 1.6 1.4 1.3 5.8 4.7 4.1 14.8 12.3 12.0 2.2 2.0 1.8 15.0 16.2 15.4
Powertech 6239.TW $51.50 $1,319 1.1 0.9 0.8 3.1 2.9 2.5 -9.5 13.5 12.1 1.3 1.3 1.2 -14.0 9.4 10.1
Median 1.6 1.4 1.2 6.6 5.4 4.9 16.0 13.5 12.1 2.3 2.1 1.8 11.9 15.3 14.9
Mean 1.7 1.5 1.3 6.2 5.1 4.5 13.2 13.6 12.0 2.0 1.9 1.7 8.4 14.1 14.7 Source: Company data, Credit Suisse estimates
ASE: Sales upside lifts profitability even ahead of the
new projects
Earnings details: 30 July 2:00PM HK time
Figure 59: ASE 2Q14/3Q14/4Q14 CS estimates vs Street in millions, unless otherwise stated
2Q14 3Q14 4Q14
ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street
Sales 39,266 19,350 58,616 57,947 ATM: +10% 42,015 24,188 66,202 67,532 43,275 35,072 78,347 75,453
Chg (%) 14.3 -9.5 7.2 5.9 EMS: Flat to Down 7.0 25.0 12.9 15.2 3.0 45.0 18.3 11.7
GM (%) 26.7 9.9 21.2 20.3 Cons. GMs: >20% 27.7 7.7 20.4 20.2 28.3 7.5 19.0 18.8
OpM (%) 16.1 3.5 12.0 10.7 17.4 2.5 11.9 11.2 18.0 3.8 11.6 10.4
Net Inc. 5,044 542 5,044 4,636 5,775 483 5,775 5,758 6,793 1,074 6,793 6,100
EPS (NT$) 0.65 0.08 0.65 0.60 0.74 0.07 0.74 0.74 0.87 0.16 0.87 0.78
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 results positive ahead of a stronger 2H14. ASE 2Q14 ATM sales reached
NT$29.3bn, +14.3% QoQ, above CS and guidance +10% QoQ, driven by
communications and IDMs. Due to tighter capacity (wirebond was at full 85-90%
utilisation and FC/test at 80%), we recently raised our GM estimates from 20.3% to
21.2%, above guidance/street of 20%. We also increase OpM from 11.1% to 12%,
taking EPS from NT$0.56 to NT$0.65, above street NT$0.59. 2Q14 consolidated sales
came in in line with our estimates at NT$58.6bn, +7.2% QoQ, despite weaker USI,
down 9.5% QoQ, as the Apple-related ramp is more timed to 2H14. We believe ASE is
2Q14 IC ATM grew 14.3%
QoQ, above CS/guidance
for up 10% QoQ
15 July 2014
Asia Semiconductor Sector 25
evaluating possibility to grow capex from current US$952 mn to US$1 bn for stronger
advanced packaging and SiP demand, though the company also noted stable order
forecast vs uptrend in previous months.
■ 2H14 growth driven by Comms and Apple-related. The company cited good
visibility through 3Q14 and also stays prudently positive on 4Q14, but will continue
monitor any signs of correction towards year end. ASE guided capacity utilisation full
through 3Q14, driven by good SiP momentum and recovery of output for its K7 plant.
We believe rolling forecasts are stabilising after several months of increases on
inventory restocking. Despite that, the company has good visibility for strength due to
Apple's refresh, ramp of LTE in China and better macro lifting broad based IDMs (30-
35% of sales). ASE noted at its AGM that it expects capacity full through 3Q14, driven
by good SiP momentum and recovery of output from K7. We model ASE IC ATM
3Q14 up high single digit QoQ and 4Q14 up low single QoQ and EMS could up
25/45% in 3Q14/4Q14.
Figure 60: SiP business adds an additional 20% growth to 2H14
Consolidated 1Q14 2Q14 3Q14 4Q14 2013 2014
Fingerprint units 13.2 16.7 38.9 71.1 39.7 139.9
Fingerprint ASPs $8.41 $8.15 $7.91 $7.67 $8.78 $7.86
NT$ $30.2 $30.2 $30.2 $30.2 $29.8 $30.2
Consolidated Sales $3,344 $4,103 $9,268 $16,453 $10,387 $33,168
COGS $2,942 $3,611 $8,156 $14,479 $9,141 $29,188
Gross Profit $401 $492 $1,112 $1,974 $1,246 $3,980
GM% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
Benefit 1Q14 2Q14 3Q14 4Q14 2013 2014
Additional sales 6.4% 7.5% 16.3% 26.6% 4.9% 14.7%
Additional GP 4.1% 4.1% 9.0% 15.3% 3.0% 8.4%
GM dilution -0.4% -0.7% -1.4% -1.9% -0.4% -1.1% Source: Company data, Credit Suisse estimates
■ iPhone related contribution could drive 15-20% of ASE's 2H14. We believe ASE
has strong penetration for projects into the iPhone refresh in 2H14. We estimate close
to US$14 content per device from SiP module for fingerprint IC, Wifi module from the
EMS division and share of packaging for the major ICs (AP, baseband, connectivity,
sensors, and security)..
Figure 61: ASE iPhone-related contribution summary
ComponentChipset
ASP
Back-end
ASPASE share
ASE ASP
(US$)
SiP Module (Fingerprint) $8.0 $8.0 80% $6.4
Wifi Module (EMS) $3.0 $3.0 100% $3.0
Application processor $20.0 $1.2 30% $0.4
LTE Baseband $30.0 $2.1 50% $1.1
Connectivity $5.0 $1.0 40% $0.4
Memory (DRAM/NAND/Controller) $40.0 $4.0 10% $0.4
PA/Switch $10.0 $1.0 10% $0.1
Sensors (Accel, Compass, Gyro, Temp, Touch) $12.0 $2.4 40% $1.0
Analog $7.5 $1.9 20% $0.4
NFC $2.0 $0.6 50% $0.3
Sensor hub $2.5 $0.6 50% $0.3
Audio Codec $3.0 $0.6 20% $0.1
CMOS sensor $3.0 $1.2 0% $0.0
Major silicon content (US$): $143.0 $26.4 $13.8
3Q14 4Q14 Total
ASE sales
(US$mn)
Apple 4.7" (CS Garcha) 8.0 39.0 47.0 $647.5
Apple 5.5" (CS Garcha) 3.0 12.0 15.0 $206.7
IPhone related sales: $854.2
% of ASE 2H14: 17.7% Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 26
ASE still expects SiP to top 20% by 4Q14 even without additional wearable projects,
up from 6-7% in 2Q14. ASE will be one of the partners for the Apple AP – volume has
started this month but will see the bigger ramp in August. We believe ASE will do
fingerprint for both iPhone 6 and iPad and also likely the iWatch SiP. However,
camera module could be over-hyped, as ASE will only be a back-up for some CIS
packaging but premature for the iPhone camera module
■ Aggressive Capex for the back-end and rising inventory pose risks later in the
year. Management noted at its AGM potential to further raise capex from 1Q14's view
of US$900-950mn and will continue to invest next year, as ASE's utilisation stays full
and still sees good demand from smartphones, tablets and also wearables and IoT in
the future. Although ASE still views semi industry capacity expansion disciplined, we
note that the 5 leading back-end players have revised up Capex by 44% since the
start of the year, taking full year capex +22% YoY. A risk for the whole group is supply
growth accelerates just as broader-based inventory adjustments come in from late
3Q14 into 4Q14, though ASE gets some insulation ramping up SiP in 2H.
■ FCF improvement more moderate now with the Capex growth. Potential capex
increase could be supported by ASE's future growth drivers, including 1) 20nm
advanced packaging, 2) system level flip chip, 3) MEMS, and 4) SiP to drive growth in
the next 3-5 years. However, we note that if Capex grows from our current assumption
of US$952mn to US$1bn, FCF would decline from US$526mn to US$453mn for 2014
(5.5% FCF yield). We model ASE's 2015 Capex to stay around US$954mn. ASE is
also still relatively leveraged, as of 1Q14, ASE already had net debt of NT$46bn
though manageable 0.31 net debt/equity ratio particularly with potential to monetize
some of its US$5.1bn USI Shanghai stake starting next year. ASE’s NT$1.3 dividend
is in line with CS, implying 64% payout ratio and 3% yield.
■ Maintain OUTPERFORM. We recently raised our 2014/2015 EPS estimates from
NT$2.50/NT$2.80 to NT$2.70/NT$3.15 and our TP from NT$42 to NT$47, based on
2.5x forward P/B, implying 15x P/E, back to the levels it reached during the prior
upturns. We stay positive on reasonable valuation factoring in the USI ownership and
potential catalysts from upcoming results upside, SiP projects, Apple A8 back-end,
DRAM, and IDM recovery.
Figure 62: ASE 2014-2016 estimates summary
2014 2015 2016
ATM USI CS Street ATM USI CS Street ATM USI CS Street
Sales 158,907 99,985 257,865 256,225 175,325 117,044 292,368 293,437 192,678 129,713 322,392 332,153
Chg (%) 10.9 27.3 17.3 16.5 10.3 17.1 13.4 13.8 9.9 10.8 10.3 13.2
GM (%) 26.8 8.5 19.8 19.6 26.9 8.7 19.6 19.6 26.8 9.0 19.6 18.8
OpM (%) 16.1 3.4 11.3 10.5 16.2 4.2 11.4 10.5 16.2 4.4 11.4 10.6
Net Inc. 21,050 2,731 21,050 20,187 24,571 3,901 24,571 24,124 27,468 4,549 27,468 27,117
EPS (NT$) 2.70 0.41 2.70 2.58 3.15 0.59 3.15 3.05 3.53 0.68 3.53 3.44
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 63: FCF still better even on the higher capex Figure 64: ASE trading at 2.3x 2014 BV
-500
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FCF (US$mn)Capex (US$ mn)
Operating CF Capex FCF
0.8x
1.6x
2.5x
3.0x
0
10
20
30
40
50
60
Sep
/99
Ma
y/0
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Ma
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4
NT$ ASE Historical PB Band
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, TEJ
15 July 2014
Asia Semiconductor Sector 27
Exhibit 65: ASE operating metrics NT$ mn 1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2011 2012 2013 2014E 2015E 2016E 2017E
Revenue 31,317 36,295 37,810 37,900 34,351 39,266 42,015 43,275 127,623 130,007 143,322 158,907 175,325 192,678 210,819
QoQ/YoY % -9% 16% 4% 0% -9% 14% 7% 3% 2% 2% 10% 11% 10% 10% 9%
Gross profit 6,224 8,719 9,646 10,448 8,243 10,492 11,655 12,230 28,737 28,664 35,037 42,620 47,161 51,554 56,245
Gross Margin 19.9% 24.0% 25.5% 27.6% 24.0% 26.7% 27.7% 28.3% 22.5% 22.0% 24.4% 26.8% 26.9% 26.8% 26.7%
Operating profit 2,669 4,807 5,383 6,150 4,210 6,338 7,293 7,781 15,326 14,363 19,009 25,622 28,482 31,162 33,983
Operating Margin 8.5% 13.2% 14.2% 16.2% 12.3% 16.1% 17.4% 18.0% 12.0% 11.0% 13.3% 16.1% 16.2% 16.2% 16.1%
Capacity (000 bonders)
Wirebonder 15,559 15,565 15,765 15,692 15,375 15,387 15,498 15,509 13,846 15,549 15,692 15,509 16,202 17,501 18,372
Tester 2,945 3,057 3,147 3,227 3,265 3,405 3,465 3,495 2,585 2,905 3,227 3,495 3,915 4,395 4,950
Copper % of wirebond 60.0% 63.4% 64.0% 65.0% 65.0% 66.0% 67.0% 68.0% 31.8% 57.4% 63.1% 79.5% 79.8% 81.0% 83.9%
Capex (US$mn) 116 236 233 83 117 402 260 146 789 1,075 668 925 950 1,000 1,050
Capex/Sales 10.9% 19.4% 18.4% 6.4% 10.3% 30.9% 18.7% 10.2% 18.1% 24.3% 13.8% 17.3% 16.1% 15.4% 14.8%
Depreciation (US$mn) 193 194 192 201 193 190 202 208 692 705 779 794 864 885 852
Depr/Sales 18.1% 15.9% 15.1% 15.6% 17.0% 14.6% 14.5% 14.5% 15.9% 15.9% 16.1% 38.5% 2.6% 5.3% 5.0%
Utilization
Packaging 75% 83% 83% 80% 81% 87% 89% 88% 86% 80% 80% 86% 90% 91% 93%
Testing 75% 82% 79% 78% 71% 83% 87% 90% 80% 80% 79% 83% 85% 85% 85%
IDM % of mix 34% 34% 35% 34% 36% 37% 37% 38% 36% 34% 34% 37% 39% 41% 43%
Flip chip % of mix 26% 27% 28% 33% 27% 28% 30% 33% 19% 24% 29% 30% 31% 34% 36% Source: Company data, Credit Suisse estimates
SPIL: Strength continues into results, but cyclical
risks rising
Earnings details: 30 July 2:30PM HKT
Figure 66: SPIL 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs street
in millions, unless otherwise stated 2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Net sales 21,928 20,737 NT$20.1-20.8bn 23,573 22,105 21,932 20,941 85,493 88,287 91,622 95,688 98,583 93,712
QoQ (%) 21.4% 14.8% +11-15% QoQ 7.5% 0.8% -7.0% -5.3% 23.3% 36.6% 7.2% 8.4% 7.6% -2.1%
GM (%) 26.2% 24.5% 23.9-25.0% 27.2% 25.0% 23.9% 23.7% 25.0% 24.1% 25.3% 23.6% 25.5% 23.8%
OpM (%) 18.1% 15.5% 15.4-16.3% 19.6% 16.4% 15.6% 14.9% 16.8% 15.6% 17.0% 16.1% 17.2% 15.3%
Net income 3,367 2,749 3,869 2,989 2,902 2,571 12,229 11,303 13,156 12,538 14,246 11,772
EPS (NT$) 1.09 0.90 $0.87-$0.96 1.25 0.96 0.94 0.82 3.95 3.66 4.25 4.02 4.60 3.75ADR EPS
(US$) 0.18 0.15 0.21 0.16 0.16 0.14 0.64 0.62 0.68 0.68 0.74 0.63 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 sales beat on Comms strength and China networking build. SPIL 2Q14
sales reached NT$21.9 bn, +21.4% QoQ, above guidance for +11-15% QoQ and
CS/Street +13.5%. Better 2Q14 sales were driven by strength from communications
(Taiwan and overseas) with strong 3G & 4G baseband demand, China networking
momentum due to 4G LTE build, and initial pickup of Apple-related PMIC, while game
console and PC were more mild. SPIL expects FC CSP's revenue contribution to grow
>25% QoQ. On higher sales and higher flip chip mix, we raised GMs from 24.8% to
26.2% above 24-25% guidance, taking OpM from 16.2% to 18.1% vs 15-16%
guidance and EPS up from NT$0.91 to NT$1.09, above guidance of NT$0.87-0.96.
■ 2H14 mix shift towards US flip chip, PMIC and game console. We expect rotation
of strength between SPIL's revenue drivers into 2H14. We expect pick-up from
overseas baseband, power mgmt. and game console and moderation in local
customers after the strong 1H14 ramp. We lifted our 3Q13 sales from +5% QoQ to
+7.5% QoQ and GMs from 25.1% to 27.2%. We model 7% QoQ decline in 4Q14 after
the strong momentum.
2Q14 beat guidance, up
21.4% QoQ, above
guidance 11-15% QoQ
15 July 2014
Asia Semiconductor Sector 28
■ Risks from slowing momentum, rising inventory and rising capex. We still see
positive momentum carrying into results season on earnings upgrades and also
upcoming Apple refresh and China LTE builds for the October holiday. Beyond that,
however, we monitor several cyclical risks due to inventory builds, rising capex and
slowing QoQ and YoY momentum through 1H15 off the higher base. We note back-
end capex has been revised up 44% and is now +22% YoY, indicating more supply
coming on as sequential momentum slows.
Figure 67: SPIL price vs inventory Figure 68: SPIL stock correlated with utilisation
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DaysNT$
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Stock price (NT$)Utilization (%)
SPIL stock Assembly Utilization Test Utilization
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ We've held a positive view, but now upside growing more limited. We have held
positive view on SPIL due to good demand drivers, share gains, improving margins
from lower material costs and reasonable valuation. Following strong 2Q14 and some
different drivers into 3Q14, we took up our estimates and target slightly. Beyond that,
we monitor risk from rising inventory, rising back-end capex and valuation near prior
peak as opportunities to take profits.
Figure 69: SPIL trading at 2.2x P/B Figure 70: SPIL has outperformed TAIEX by 25% YTD
1.2x
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NT$ SPIL Historical PB Band
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 TAIEX Average SPIL Average 2014 TAIEX
SPIL Indexed share price
Source: Company data, Credit Suisse research, TEJ Source: Company data, Credit Suisse estimates
■ Maintain OUTPERFORM, less upside after the run. We maintain OUTPERFORM
factoring in better 1H14 and recently lifted our TP from NT$54 to NT$56, based on
same 2.4x forward P/B, a level achieved in the '98, 00, 02, 04, 07 and 2010 up-cycles
and achievable with ROEs moving back to high teens and margins at post-crisis highs.
15 July 2014
Asia Semiconductor Sector 29
Figure 71: SPIL operating metrics NT$ mn 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E 2011 2012 2013E 2014E 2015E 2015E 2015E
Revenue 13,819 17,602 19,092 18,844 18,060 21,928 23,573 21,932 61,237 64,655 69,356 85,493 91,622 98,583 ######
QoQ/YoY % -14% 27% 8% -1% -4% 21% 8% -7% -4% 6% 7% 23% 7% 8% 8%
Gross profit 2,017 3,676 4,417 4,320 3,995 5,734 6,408 5,242 9,490 11,777 14,429 21,379 23,184 25,138 27,614
Gross Margin 14.6% 20.9% 23.1% 22.9% 22.1% 26.2% 27.2% 23.9% 15.5% 18.2% 20.8% 25.0% 25.3% 25.5% 26.0%
Operating profit 637 1,896 2,758 2,646 2,392 3,972 4,609 3,430 5,090 6,446 7,937 14,402 15,607 16,936 18,717
Operating Margin 4.6% 10.8% 14.4% 14.0% 13.2% 18.1% 19.6% 15.6% 8.3% 10.0% 11.4% 16.8% 17.0% 17.2% 17.6%
Capacity (0000 bonders)
Wirebonders 7,805 7,893 7,903 7,541 7,326 7,539 7,751 7,812 6,405 7,805 7,805 7,326 7,943 8,281 8,532
Testers 403 409 419 417 431 481 538 545 334 407 417 545 579 637 684
Copper % of wirebond 64.4% 70.6% 72.6% 74.6% 75.1% 75.6% 76.1% 76.6% 26.7% 49.9% 70.6% 75.9% 77.9% 78.4% 78.9%
Capex (US$mn) 101 151 171 80 99 201 214 84 374 512 503 599 510 517 522
Capex/Revenue 21.8% 25.5% 26.8% 12.5% 16.7% 27.5% 27.2% 11.5% 17.9% 23.4% 21.6% 21.1% 16.7% 15.7% 14.7%
Depreciation (US$mn) 86 87 90 95 94 101 105 111 318 330 358 411 471 509 509
Depr/Sales 18.5% 14.8% 14.1% 14.9% 15.8% 13.8% 13.4% 15.1% 15.2% 15.1% 15.4% 14.4% 15.4% 15.5% 14.4%
Utilisation
Packaging 78% 98% 95% 80% 76% 93% 96% 89% 90% 96% 88% 89% 89% 92% 94%
Testing 68% 80% 91% 95% 86% 97% 94% 87% 71% 77% 83% 91% 89% 90% 94%
IDM % of mix 6% 6% 5% 6% 5% 5% 5% 5% 13% 10% 6% 4% 4% 4% 3%
Bumping & FCBGA 26% 28% 31% 38% 39% 40% 41% 42% 20% 24% 31% 40% 44% 47% 50% Source: Company data, Credit Suisse estimates
Powertech: Better memory trends keep the business
on track for improvement
Earnings details: 22 July 2:30PM HK time
Figure 72: Powertech 2Q14/3Q14/4Q14 estimates vs Street summary In NT$ mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales 10,580 10,330 Up >10% QoQ 11,109 11,001 11,109 10,427 42,024 41,259 45,190 44,968 48,920 46,575
Chg (%) 14.7 12.0 5.0 4.0 0.0 -5.2 11.8 9.7 7.5 9.0 8.3 3.6
GM (%) 16.0 16.3 ~15%+ 16.4 17.4 16.2 16.7 15.7 16.2 16.4 16.4 16.3 NM
OpM (%) 10.3 10.3 10.7 11.2 10.5 10.6 9.9 10.2 10.6 11.3 10.6 11.3
Net Inc. 715 731 807 869 785 779 2,904 3,021 3,249 3,564 3,593 3,386
EPS (NT$) 0.94 0.93 1.06 1.11 1.03 0.99 3.80 3.75 4.25 4.32 4.70 4.08
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 sales upside in line with latest expectations. Powertech 2Q14 sales reached
NT$10.6bn, +14.7% QoQ and above CS /Street of 12.0%/11.7% QoQ growth, but in
line with our latest expectations. We believe sales upside is coming from commodity
and mobile DRAM, with sales mix split pretty evenly with DRAM and NAND each
about 35% and logic 30%. We expect higher sales and rising utilisation (assembly at
90%, test above 80%) to lift GM above company guidance for 15%+ and our 15.6%.
We revise estimates to factor better 2Q14 sales, lift GMs from 15.6% to 16% and OpM
from 9.8% to 10.3%, taking EPS from NT$0.85 to NT$0.94. We note that 2Q14 GM
could still have room for even more upside to our estimates on the higher utilisation.
■ 2H14 should have more growth off the higher base. We model +5% QoQ growth
off the higher 2Q14 sales base. The company has several growth drivers: (1) mobile
DRAM ramping with flagship models, with models converting from LPDDR2 to
LPDDR3 also requiring high speed test, an area of lower utilisation for Powertech, (2)
GDDR5 output ramping up for the Sony game console, (3) additional supply coming
from late 3Q14 from Toshiba Fab 5 Phase 2, (4) more product for eMC:DP/eMMC
paired with Kingston, which is seeing 50% volume growth in this area YoY, and (5)
steady growth from Greatek and advanced logic where the company has qualified US
customer for bumping and a local Taiwan and China fabless
Powertech 2Q14 sales
above +15% QoQ, GM
should follow
15 July 2014
Asia Semiconductor Sector 30
Figure 73: Powertech margins stabilising at a lower level
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Source: Company data, Credit Suisse estimates
■ Commodity exposure down, though still a risk to monitor. Powertech has reduced
commodity DRAM test from 80% to 15% of sales the past 5 years but still supplies the
Micron camp for most of that stream. We expect Micron would move some test to its
Xian facility next year on 20nm though could still use its outsource partners for
assembly, keeping business with Powertech and competitors ChipMOS, ASE and
Walton. Powertech may keep most of its mobile DRAM but could face some risk on
the commodity test portion. We would monitor the development for 2015 but expect
2014 share to stay stable among the industry players.
Figure 74: Commodity DRAM revenue coming down Figure 75: Powertech working on growing logic
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Commodity DRAM Mobile DRAM NANDGreatek Advanced Logic
Quarterly sales (NT$mn)
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Advanced Logic Greatek NAND Mobile DRAM Commodity DRAM Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Maintain OUTPERFORM with valuation reasonable. We recently raised our
2014/2015/2016 EPS from NT$3.50/NT$4.00/NT$4.50 to NT$3.80/NT$4.25/NT$4.70
and also lift our TP from NT$59 to NT$63, using 1.5x P/B, midpoint the post crisis
range, with additional upside possible from operating leverage or scale in the logic
business. With operating cash flow at NT$11 bn per year vs capex of NT$8 bn, the
company is generating over NT$4 per share in free cash flow (8% free cash flow
yield), still enough to maintain 70% dividend payout to fund its NT$2 cash dividend
(3.8% yield). Powertech is still at reasonable valuation at 1.3x P/B vs 1.0-3.0x range
and business improving this year and driving some return of earnings upgrades.
Still monitoring the
commodity risk in 2015
15 July 2014
Asia Semiconductor Sector 31
Figure 76: Powertech still trading near trough at 1.3x P/B Figure 77: Powertech FCF yield near 8% and rising
1x
1.5x
2x
2.8x
5
25
45
65
85
105
Apr/03 Jul/04 Oct/05 Jan/07 Apr/08 Jul/09 Oct/10 Jan/12 Apr/13 Jul/14
NT$Powertech historical PB band
-10%
0%
10%
20%
30%
40%
0
4,000
8,000
12,000
16,000
20,000
CY
05
CY
06
CY
07
CY
08
CY
09
CY
10
CY
11
CY
12
CY
13
CY
14
CY
15
Op Cash Flow Capex FCF Yield
Dividend Yield Linear (FCF Yield)
Op CF / Capex (NT$mn) Dividend / FCF Yield (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
ASM Pacific: LED/Back-end capex revisions to lift the
company's results and outlook
Earnings details: 24 July 12:30PM HK time
Figure 78: ASM 2Q14/3Q14 and 2014/2015 estimates revisions vs Street summary in HK$ millions, unless otherwise stated ASM Pacific Jun-14E Sep-14E 2014E 2015E 2016E
CS CS Orig. Cons Guidance CS CS Orig. Cons CS CS Orig. Cons CS CS Orig. Cons
Revenue $3,299.7 $3,133.8 $3,314.3 Mod. Double Digit $3,657.1 $3,542.7 $3,641.3 $12,924.6 $12,535.5 $12,994.5 $14,373.9 $13,922.4 $14,428.3
% Q/Q chng 32.3% 25.7% 32.9% YoY Growth 10.8% 13.0% 10.4%
% Y/Y chng 15.8% 10.0% 16.3% 17.9% 14.2% 17.4% 19.2% 15.6% 19.9% 11.2% 11.1% 11.0%
Gross Margin 35.5% 34.3% 35.0% Profitability up 37.6% 35.9% 36.2% 34.9% 34.0% 34.3% 34.2% 33.4% 35.0%
R&D Expense $244.9 $245 $254.6 $255 $984 $984 $991 $991
SG&A Expense $382.8 $383 $398.1 $398 $1,539 $1,539 $1,550 $1,550
Op. Expenses $627.6 $628 $652.7 $653 $2,523 $2,523 $2,541 $2,541
Op Margin 16.4% 14.2% 13.4% 19.8% 17.5% 14.9% 15.4% 13.9% 14.2% 16.5% 15.1% 15.4%
Net Income (PF) $439.8 $360.4 $364.3 $588.2 $502.0 $441.0 $1,601.3 $1,401.9 $1,552.0 $1,923.2 $1,704.5 $1,869.5
Net Margin 13.3% 11.5% 11.0% 16.1% 14.2% 12.1% 12.4% 11.2% 11.9% 13.4% 12.2% 13.0%
GAAP EPS $1.10 $0.90 $0.88 $1.47 $1.25 $1.07 $4.00 $3.50 $3.83 $4.80 $4.25 $4.59
Diluted shares 400.6 400.6 400.6 400.6 400.6 400.6 400.6 400.6 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 tracking to upside. ASM guided 2Q14 to grow double digits YoY, driven by
strength across lead frame, back-end and SMT. We raise our estimate from
HK$3,114mn, +26% QoQ and +10% YoY to HK$3,300 bn, +32% QoQ and +16%
YoY, vs street +32.9% QoQ and +16.3% YoY but consistent with management tone to
grow moderate double digits YoY. On better sales we also revise up GM from 34.3%
to 35.5%, vs street 35%.
Figure 79: Assembly & packaging up to 51% of sales Figure 80: ASM sales trend by product
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-0
7
Se
p-0
7
Mar-0
8
Se
p-0
8
Mar-0
9
Se
p-0
9
Mar-1
0
Se
p-1
0
Mar-1
1
Se
p-1
1
Mar-1
2
Se
p-1
2
Mar-1
3
Se
p-1
3
Mar-1
4E
Se
p-1
4E
Assembly and Packaging Lead frame Surface mount technology
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Mar-0
7
Sep-0
7
Mar-0
8
Sep-0
8
Mar-0
9
Sep-0
9
Mar-1
0
Sep-1
0
Mar-1
1
Sep-1
1
Mar-1
2
Sep-1
2
Mar-1
3
Sep-1
3
Mar-1
4E
Sep-1
4E
Sales: HK$mn
Assembly and Packaging Lead frame Surface mount technology Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We take up our OpM estimates from 14.2% to 16.4%, vs street 13.4% on operating
leverage after the company's transition to a more flexible model to outsource more
15 July 2014
Asia Semiconductor Sector 32
and replace departed full-time workers with contract workers. ASM Pacific also has
good market share of 22% in its addressable took market.
■ 3Q14 outlook supported by the DEK acquisition. We model +11% QoQ growth off
higher base in 3Q14, lifting GMs to 37.6% and OpM to 19.8%. The company should
benefit from the rising bookings in 2Q14 across LED and back-end, with industry back-
end orders now at last year's highs but likely pushing a bit higher. The company
announced completion of its DEK acquisition on 3 July. It expects the DEK business to
contribute to higher SMT segment growth, as DEK has recent run rate around US$35-
40 mn/quarter (incremental 6% of sales) at 35% GMs and 10% OpMs but peak run
rate of $70mn quarter and original margin structure closer to 40% GMs and 20%
OpMs. The company should get synergies from the product as the DEK product line
adds the screen printer, a process step that directs solder paste placement on a PCB
board and complements its strong existing position in pick and place machines. The
company will also develop an intermediate solder paste inspection tool to offer an end
to end product suite for more synergies.
Figure 81: ASM long-term revenue by segment vs gross
margins trends
Figure 82: Backlog as an early indicator of forward sales
15%
20%
25%
30%
35%
40%
45%
50%
55%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Mar-0
7
Se
p-0
7
Mar-0
8
Se
p-0
8
Mar-0
9
Se
p-0
9
Mar-1
0
Se
p-1
0
Mar-1
1
Se
p-1
1
Mar-1
2
Se
p-1
2
Mar-1
3
Se
p-1
3
Mar-1
4
Se
p-1
4E
GM (%)
Surface mount technology Lead frameAssembly and Packaging Back-end GMSMT GM Total GM
Sales (US$mn)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
$0
$75
$150
$225
$300
$375
$450
$525
$600
Ma
r-0
7Jun-0
7S
ep-0
7D
ec-0
7M
ar-
08
Jun-0
8S
ep-0
8D
ec-0
8M
ar-
09
Jun-0
9S
ep-0
9D
ec-0
9M
ar-
10
Jun-1
0S
ep-1
0D
ec-1
0M
ar-
11
Jun-1
1S
ep-1
1D
ec-1
1M
ar-
12
Jun-1
2S
ep-1
2D
ec-1
2M
ar-
13
Jun-1
3S
ep-1
3D
ec-1
3M
ar-
14
Backlog Forward Qtr Sales Backlog % of forward qtr sales
Backlog as % of forward salesBacklog / Forward Sales (US$mn)
Average: 96%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Industry bookings approaching last peak. ASM stock traditionally peaks ahead of
industry bookings peak and as of May, industry bookings had reached last year's
peak. However, we note that continued upward Capex revision from back-end
customers YTD could support a higher peak as the industry catches up from low
investment the past couple years and the LED market also resumes capex. ASM
Pacific saw strong bookings momentum for its back-end and SMT business in 1Q14,
up 54% and 34% QoQ respectively as the industry cyclically rebounds from 4Q13 lows
following the industry inventory correction. The company's book:bill ratio recovered to
1.26 and lifted backlog 33% to US$341mn, pointing to good growth into 2Q14.
Figure 83: ASM stock peaking ahead of bookings peak Figure 84: ASM book-to-bill improving across segments
0
75
150
225
300
375
450
0
25
50
75
100
125
150
Jan
-01
Se
p-0
1
Ma
y-0
2
Jan
-03
Se
p-0
3
Ma
y-0
4
Jan
-05
Se
p-0
5
Ma
y-0
6
Jan
-07
Se
p-0
7
Ma
y-0
8
Jan
-09
Se
p-0
9
Ma
y-1
0
Jan
-11
Se
p-1
1
Ma
y-1
2
Jan
-13
Se
p-1
3
Ma
y-1
4
Equipment Bookings (US$ mn)
Stock Price
BE Bookings ASM Pacific Stock Price
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
100
200
300
400
500
600
Ma
r-0
7Jun-0
7S
ep-0
7D
ec-0
7M
ar-
08
Jun-0
8S
ep-0
8D
ec-0
8M
ar-
09
Jun-0
9S
ep-0
9D
ec-0
9M
ar-
10
Jun-1
0S
ep-1
0D
ec-1
0M
ar-
11
Jun-1
1S
ep-1
1D
ec-1
1M
ar-
12
Jun-1
2S
ep-1
2D
ec-1
2M
ar-
13
Jun-1
3S
ep-1
3D
ec-1
3M
ar-
14
Bookings Billings B:Bill
Book to Bill RatioBookings / Billings (US$mn)
Source: Company data, Credit Suisse research, SEMI Source: Company data, Credit Suisse estimates
Expect low teens QoQ
growth in 3Q14
15 July 2014
Asia Semiconductor Sector 33
■ Raising estimates, maintain OUTPERFORM ahead of results. We raise our
2014/2015E sales from HK$12,536 mn/HK$13,922 mn to HK$12,925mn/HK$14,374
mn and EPS from HK$3.50/HK$4.25 to HK$4.00/HK$4.80, slightly above street EPS
of HK$3.83/HK$4.59 respectively. With the industry still recovering and management
taking strides to improve profitability, maintain our target at HK$97, reflecting 5x
forward P/B, midpoint of its broad trading range of 3-7x P/B. The stock traditionally has
maintained a high multiple during periods of improving sales and margins though we
would acknowledge some risk later in the year from the shortening industry cycles in
electronics, as orders should seasonally decelerate by 3Q14. ASM is currently trading
at 4.6x/4.3x 2014/2015 P/B and 24.1x/19.8x 2014/2015 P/E.
Figure 85: ASM Pacific P/E - trading at 24x 2014E EPS Figure 86: ASM Pacific P/B – trading at 4.6x 2014E P/B
10.5x
20x
40x
60x
0
50
100
150
200
250
300
350
400
450
Jan
-03
Se
p-0
3
Ma
y-0
4
Jan
-05
Se
p-0
5
Ma
y-0
6
Jan
-07
Se
p-0
7
Ma
y-0
8
Jan
-09
Se
p-0
9
Ma
y-1
0
Jan
-11
Se
p-1
1
Ma
y-1
2
Jan
-13
Se
p-1
3
Ma
y-1
4
(NT$)
2.5x
3.8x
5.0x
7.0x
0102030405060708090
100110120130
Jan
-03
Sep
-03
May-0
4
Jan
-05
Sep
-05
May-0
6
Jan
-07
Sep
-07
May-0
8
Jan
-09
Sep
-09
May-1
0
Jan
-11
Sep
-11
May-1
2
Jan
-13
Sep
-13
May-1
4
(NT$)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Amkor: IPhone 6 and emerging market smartphone
strength to drive beat and raise quarter
Earnings details: TBD
Figure 87: AMKR summary of expectations US$ in millions, unless otherwise stated
AMKR Mar-14
Reported CS Cons Guidance CS Cons CS Cons CS Cons
Total Revenue $696.0 $762.0 $761.4 $735-785m $853.4 $826.7 $3,139.3 $3,124.2 $3,332.3 $3,329.1
% Q/Q chng -7.8% 9.5% 9.4% 12.0% 8.6%
% Y/Y chng 1.2% 2.1% 2.1% 11.1% 7.6% 6.2% 5.7% 6.1% 6.6%
Total GM* 18.5% 20.1% 18-21% 22.6% 20.8% 21.1%
R&D Expense* $21.0 $21.7 $21.5 $85.6 $88.9
SG&A Expense* $62.4 $64.4 $63.7 $253.9 $265.0
Operating Exp.* $83.5 $86.1 $85.1 $339.5 $353.8
Operating Mgin* 6.5% 8.8% 7.9% 12.6% 9.7% 9.9% 10.5%
Net Income* $20.6 $32.9 $64.8 $171.2 $192.1
Net Margin* 3.0% 0.0% 7.6% 5.5% 5.8%
EPS* $0.09 $0.14 $0.15 $0.08 to $0.18 $0.28 $0.24 $0.73 $0.70 $0.82 $0.87
Fully diluted shares 235.5 235.5 235.5 235.5 235.5
Sep-14Jun-14 F2014E F2015E
Source: Thomson One, Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 34
AMKR: Recap of recent stock performance
Exhibit 88: AMKR absolute price Exhibit 89: LTM performance vs SOXX vs SPX
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0
$12.0
$13.0
Jun-1
3
Jul-
13
Au
g-1
3
Se
p-1
3
Oct
-13
Nov-
13
Dec-
13
Jan
-14
Fe
b-1
4
Ma
r-1
4
Ap
r-14
Ma
y-14
Jun
-14
AMKR 50DMA 200DMA
0.75x
1.00x
1.25x
1.50x
1.75x
2.00x
2.25x
2.50x
Jun
-13
Jul-
13
Aug
-13
Se
p-1
3
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Fe
b-1
4
Ma
r-1
4
Ap
r-14
Ma
y-14
Jun
-14
AMKR vs. SOXX AMKR vs. S&P 500
Source: Thomson One, Company data, Credit Suisse estimates Source: Thomson One, Company data, Credit Suisse estimates
■ Expect 2Q14 (JunQ) results in line with CS/Street estimates. We expect AMKR to
report its 2Q14 revenue above CS/Street estimates of $762mn (+9.5% QoQ)/$761 mn
(+9.4% QoQ) and above the mid-point of the Company's guidance calling for $735 mn
to $785 mn (implies +5.6% to +12.8% QoQ) and above normal seasonal of up 8.4%
QoQ as we are seeing low supply chain inventory drive better restocking across most
of the upstream. While AMKR's exposure to Asian fabless Semiconductor companies
is relatively low (Asian semi are <5% of revenue for AMKR versus >15% for peers)
which could potentially result in lower than peer growth, early 20nm strength could be
an offsetting factor and drive above expected growth into 2H14. We would also point
out TSMC's June quarter revenue is tracking to the high end of guidance of +21.4-
23.5% QoQ. We currently model GM of 20.1% (+160 bp QoQ), above the mid-point of
the Company's guidance calling for 18% to 21%. We currently model OpEx of $86.1
mn (+3.2% QoQ). We expect that higher revenues can drive EPS above CS/Street
estimate of $0.14/0.15.
■ Expect 3Q14 (SepQ) guidance in line with CS/Street estimates. We expect AMKR
to guide 3Q14 revenue in line with CS/Street estimates of $853 mn (+12% QoQ)/$827
mn (+8.6% QoQ) – the five-year (excluding 2009) mean/median sequential revenue
growth rates are +4.5%/+4.5% QoQ in C3Q. We expect: (1) the continued ramp of
20nm mobile design wins including AAPL, (2) the fingerprint design win the company
mentioned during its 4Q13 and 1Q14 earnings conference call (while the Company did
not specify the exact details, we think leverage to Samsung's Galaxy S5) to support
the expected sequential growth during the Sep quarter. We currently model GM of
22.6% (+250 bp QoQ) driven by the expected sequential revenue growth with an
implied incremental GM of 43%, in line with historical patterns. We currently model
OpEx of $86.1 mn (-1.1% QoQ) driving our EPS estimate of $0.28 – Street is currently
modelling EPS of $0.24.
■ 2014 Outlook. AMKR continues its focus to emphasize increasing exposure/leverage
to fabless Chinese and Taiwanese players (1 fab in China and 3 fabs in Taiwan) – the
Company indicated that while the current exposure is limited to 1-2% of total revenue,
it hopes to achieve 2-3x 2013 sales level in 2014. In addition, AMKR is focusing on
improving mainstream packaging with its power discrete and J-Devices higher focus
on stable growth areas in Auto. In MarQ call, management also indicated its
increasing focus to penetrate the Analog space and is hoping to penetrate a wider
customer base in 2014. Relative to financials, AMKR expects (1) a sequential growth
in C3Q14 and now targets growth over the Semi industry, (2) GM to continue to
improve and reach low 20% GM in C2H14, (3) quarterly OpEx in the range of ~$85m
and (4) a tax rate of roughly 22% for the year, down from the original 27% projection.
CapEx was also raised from $450m to $575m to support communications ramps, with
~50% for advanced, ~30% mainstream, ~10% infrastructure and ~10% for R&D
15 July 2014
Asia Semiconductor Sector 35
(largely 2.5-D and 3-D). We are modeling CY14 revenues of $3.94 bn (up 6.2%
YoY)/$0.73 vs Street at $3.12 bn (up 5.7% YoY)/$0.70. We expect GM of 20.8% (up
200 bp YoY) and Opex of $340 mn (up 8.6% YoY).
■ 20nm commentary is supportive of AAPL's expected product refreshes in
C2H14. AMKR's commentary indicating 20nm revenue ramping in C1H14 is
supportive of AAPL's expected product refreshes in C2H14. AMKR has stated that the
Company is working closely with multiple customers on high-volume 20nm designs
and is observing good yields – AMKR also believes that it will observe meaningful
revenue ramp from new products during C2H14 – all of these comments are
consistent with the expected ramp for AAPL's 20nm products. We believe Amkor
would be one of 3 suppliers for the Apple processor orders as it shifts from Samsung
to TSMC starting from 2Q14. The revenue opportunity may stay somewhat moderate
as we believe TSMC would retain bumping and Apple may consign its own substrates.
Based on remaining revenue for flip chip and test, we project Apple could add 4-5% of
sales once fully ramped.
Exhibit 90: AMKR AAPL opportunity
Back-end opportunity 2009 2010 2011 2012 2013 2014 2015
Apple processor units (mn) 46.4 87.3 153.2 219.8 239.3 230.7 227.1
Flip chip (US$) $1.0 $1.0 $0.9 $0.9 $0.8 $0.8 $0.7
Flip chip sales (US$mn) $46 $83 $138 $188 $195 $179 $167
Wafers (000) 56.8 106.9 327.2 586.9 585.8 565.6 556.5
Bumping ($/wafer) $400.0 $384.0 $368.6 $353.9 $339.7 $326.1 $313.1
Bumping sales (US$mn) $23 $41 $121 $208 $199 $184 $174
Testing/unit (US$) $0.50 $0.48 $0.45 $0.43 $0.41 $0.39 $0.37
Test sales (US$) $23 $41 $69 $94 $97 $89 $83
Apple back-end opportunity: $92 $165 $328 $490 $491 $452 $425
ASE share: 0% 0% 0% 0% 0% 25% 40%
Amkor Apple opportunity: $0 $0 $0 $0 $0 $113 $170
% of Amkor sales 0.0% 0.0% 0.0% 0.0% 0.0% 3.6% 5.2%
Amkor sales $2,179 $2,939 $2,776 $2,760 $2,956 $3,123 $3,261 Source: Company data, Credit Suisse estimates
■ QCOM share loss could impact 2014. QCOM is AMKR's largest customer and
represented 20-25% of revenue in 2013. We estimate that AMKR had a 33-35%
market share of QCOM's Assembly and Test business. In addition to AMKR, ASE and
Stats ChipPAC were the other major OSAT suppliers for QCOM in 2012, but QCOM
has recently started to ramp production at SPIL. We believe that this will result in
approximately a 7% market share loss for AMKR, implying that even with
approximately a 10% growth in packaging services for QCOM, AMKR's revenue from
QCOM can potentially decline in 2014 by approximately $100m.
■ Outlook drivers. Amkor expects to outpace the semiconductor industry growth rate,
which CS now estimates at +8% YoY and industry forecasts have in the 5-8% YoY
range. Amkor has several key drivers: (1) 20nm production ramp of high-end
application processor for Apple and, (2) seasonal ramp by its largest customer
Qualcomm, with Snapdragon 800 leading the high-end and first wave of China LTE
launching, (3) ramp of fingerprint IC packaging, an upside driver through 1H14, (4)
addition of low cost Asian smartphone customers (from 1-2% of sales now to 3%+
exiting 2014, (5) memory growth from Toshiba NAND/Mobile DRAM (+10% YoY to
US$330m), and (6) better utilisation of analog and power discrete assets. As one
offset, we believe Qualcomm is still ramping up its fourth source in SPIL this year and
Amkor still remains a bit under-exposed to Taiwan/China despite recent new design
win and focus on this area. We believe Amkor would be one of 3 suppliers for the
Apple processor orders as it shifts from Samsung to TSMC starting from 2Q14. The
revenue opportunity may stay somewhat moderate as we believe TSMC would retain
bumping and Apple may consign its own substrates. Based on remaining revenue for
flip chip and test, we project Apple could add up to 5% of sales once fully ramped.
15 July 2014
Asia Semiconductor Sector 36
■ Investment view and valuation. AMKR is a technology leader in packaging and has
the highest exposure among OSAT’s to flip chip and Wafer-level Packaging (43% of
revenue from advanced packaging versus 25-30% for ASE and SPIL) – we think this
will help the company improve its sales and margin outlook as the packaging industry
transitions from wirebonding to advanced packaging. AMKR is also increasing its
focus on gaining market share at Asian chip companies which serve the low/mid end
smartphone markets and are moving to more advanced packaging and adding new
supply sources as they grow. At the same time, execution on mainstream products is
improving by shifting to add more automotive business and pull in IDM acquisitions
including J-Devices and Toshiba's Malaysia discrete facility.
AMKR’s high exposure to high-end smartphone segment is a concern, but AAPL
20nm ramp provides an incremental opportunity for revenue growth at the high end
from 2Q14. AAPL could add revenue of ~$120 mn in 2014 and ~$175 mn in 2015. Our
2014 revenue estimate includes ~$160 mn of revenue arising from the Discrete Power
business acquisition but factoring approximately a $100 mn drag to reflect QCOM
diversifying to SPIL. Our TP of $8.40 represents 2x of BV, 4x EV/EBITDA, 11.5x
2014E EPS and 10.0x 2015E EPS.
Exhibit 91: P/BV: AMKR cheap vs historical levels Exhibit 92: EV/EBITDA: AMKR cheap vs historical levels
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
P/BV
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
EV/EBITDA
Source: FactSet, Company data, Credit Suisse estimates Source: FactSet, Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 37
IC-Design: Weathering the 3G to 4G transition Figure 93: Credit Suisse versus street estimates for IC Design In NT$ mn, unless otherwise stated
IC design 2Q14 3Q14 4Q14 2014 2015
(NT$ mn) CS Street CS Street CS Street CS Street CS Street
MediaTek sales 54,133 52,787 57,682 56,635 51,538 53,792 209,358 208,360 231,117 237,073
Growth 17.7 14.7 6.6 4.6 -10.7 -5.0 53.9 53.1 10.4 13.8
Operating Profit 13,339 14,270 10,663 49,086 53,849
Net income 12,509 11,831 13,679 13,027 10,325 11,917 46,307 46,694 51,535 51,737
EPS (NT$) 8.01 7.65 8.76 8.45 6.61 7.71 30.00 30.13 33.00 32.83
Realtek sales 8,045 7,776 8,293 8,105 7,485 7,800 31,156 30,882 32,659 32,062
Growth 9.7 6.5 3.1 4.2 -9.7 -3.8 10.6 9.6 4.8 3.8
Operating Profit 831 804 418 2,846 3,045 3,045
Net income 863 815 848 832 500 781 3,031 3,160 3,200 2,941
EPS (NT$) 1.71 1.61 1.68 1.63 0.99 1.48 6.00 6.47 6.34 5.90
WPG sales 109,799 111,298 119,132 120,885 111,388 115,492 442,648 448,186 480,147 480,852
Growth 7.3 8.8 8.5 10.1 -6.5 -4.5 9.0 10.3 8.5 7.3
Operating Profit 2,024 2,120 1,679 7,732 8,744
Net income 1,498 1,414 1,576 1,634 1,186 1,453 5,656 5,722 6,378 6,536
EPS (NT$) 0.90 0.86 0.95 0.98 0.72 0.87 3.42 3.42 3.85 3.85 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
IC design had a solid 2Q14 driven by China brand export demand and octa-core growth
and upside for PC and consumer. Off a better 1H14, we expect guidance to be up a
moderate mid-high single digits QoQ into the peak season, near current street estimates
but below traditional 10-30% QoQ strength. We view Mediatek still weathering the 3G to
4G transition due to strength of export shipments, short gap to peers launching LTE SoCs
in 2H14 and less impact this transition from the China IC vendors. We also expect a
decent outlook for Realtek and WPG into high season demand.
■ Mediatek 2Q14 at the upper half of guidance, 3Q14 supported by reasonable
expectations. 2Q14 sales came in at NT$54.1 bn, +17.7% QoQ, reaching the upper
end of guidance of +12-20% QoQ, but slightly below CS' original +20.5% QoQ due to
faster 4G LTE transition in China at the expense of TD-SCDMA. 2Q14 growth has
been led by export 3G share gains and continued growth of octa-core in the mix to
take smartphone units to ~88 mn. Mediatek should enter high season in 3Q14, with a
faster pick-up in August as export market returns to normal seasonal peak. We model in
LTE ramping up to 5 mn units out of 97 mn units. Our 3Q14 sales growth now implies
+6.6% QoQ vs street +4.6% QoQ with flat to slightly down GMs at 48.5% as octa-core
price declines and LTE ramps, though OpM stays steady at 24.7% and EPS at NT$8.76.
Mediatek remains on track to 15mn LTE shipment guidance with high-end 6595
launching today July 15th and SoC on track for 4Q14 volume.
■ Realtek rebound as mature PC products, audio codec and TVs coming back on
share gains. Realtek June sales declined 3.1% MoM to NT$2.45bn, taking 2Q14 to
grow 10.2% QoQ, in line with CS 9.8% QoQ and company guidance for growth across
communications networks, computer peripheral and multimedia. 2Q14 sales were
mainly driven by PC as market stabilises and Realtek gains share since competitors
(Atheros, Broadcom) exit mature products (10/100, HD audio codec and Gigabyte
NIC). Other areas of growth include Internet (gigabyte Ethernet switch, ASDL, router,
card reader) and some Audio for consumer (CE codec reference designs with Intel
and NVIDIA on Xiaomi's tablet). TV growth is also up 40% YoY with traction with the
Chinese brands (Hisense, TCL, Skyworth). The company expects July will be slightly
better than June, as customers traditionally hold back orders at quarter end to better
15 July 2014
Asia Semiconductor Sector 38
manage inventory levels. It has not seen correction through July and 3Q is a normal
seasonal peak, though will continue to monitor any year end slowdown.
■ WPG also sees upside from smartphones and tablets. 2Q14 sales reached
NT$113.7bn, +11% QoQ, significantly above guidance of 3-8% QoQ growth. WPG
noted that 2Q14 will see even growth across all end markets, with smartphone growth
persisting. It also expects to see incremental rebound in PC/NB driven by replacement
demand as Microsoft discontinued Windows XP support. WPG views 2014 slightly more
second half loaded with seasonal peak in 2Q/3Q and does not see a major 4Q
correction yet. We model 3Q14 sales +9% QoQ, near street of +10% QoQ as the
customer sees builds for smartphones, Apple related and some improvement in PC
orders.
Mediatek: A break from strong upside, but ramps
continue for LTE/exports
Earnings details: Late July 2PM HK time (Mandarin), 4PM HK time (English)
Figure 94: Mediatek CS vs street estimates for 4Q13/1Q14/2Q14 and 2013-2015 In mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales $54,133 $52,787 NT$51.5-55.2bn $57,682 $56,635 $51,538 $53,792 $209,358 $208,360 $231,117 $237,073 $244,740 $252,973
Chg 17.7% 14.7% +12-20% QoQ 6.6% 4.6% -10.7% -5.0% 53.9% 53.1% 10.4% 13.8% 5.9% 6.7%
GM% 49.0% 48.4% 47.5-49.5% 48.5% 47.9% 47.5% 47.6% 48.4% 47.8% 48.1% 46.4% 47.9% 45.3%
OpM% 24.6% 22.8% 20.5-26.5% 24.7% 23.8% 20.7% 23.2% 23.4% 23.8% 23.3% 23.3% 24.3% 23.5%
Net Inc. 12,509 11,831 13,679 13,027 10,325 11,917 46,307 46,694 51,535 51,737 56,679 54,088
EPS (NT$) $8.01 $7.65 $8.76 $8.45 $6.61 $7.71 $30.00 $30.13 $33.00 $32.83 $36.29 $33.67 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 reaches the upper half of guidance. 2Q14 sales came in at NT$54.1 bn,
+17.7% QoQ, reaching the upper end of guidance of +12-20% QoQ, but slightly below
CS' original +20.5% QoQ due to faster 4G LTE transition in China at the expense of TD-
SCDMA. 2Q14 growth has been led by export 3G share gains and continued growth of
octa-core in the mix to take smartphone units to ~88 mn. We believe it has seen more
demand than it built for its LTE modem paired with quad core MT6582 from Chinese
customers in June. Following June sales, we factored in 2Q14 sales, kept our GM
estimates at the upper end of 47.5-49.5% guidance at 49%, but slightly trimmed OpM
from 25.1% to 24.6% on less operating leverage, taking EPS down from NT$8.35 to
NT$8.01.
■ MIIT market data as a read on the 3G to 4G transition. We analysed China's MIIT
data as well for broader trends on the market, which is the government's figures for
handset shipments by standard and phone type. We would analyse MIIT only for
directional trends as the data has shown a pretty wide mismatch with brands
performance and the supply chain the past year. The government’s MIIT data does not
always track the market trend or supply chain, having shown a smartphone peak last
year in 2Q13 ahead of 3 quarters of stronger shipments in the market by the supply
chain and China brands.
The following is a summary of the key data with rising mix in June:
o China handset shipments up. China handsets were +16% MoM and flat YoY at
42.5mn.
o China smartphones also increase. China smartphones increased +17% MoM
and 23% YoY to 37mn units
o 4G ramps, 3G holds flat. 4G smartphone shipments increased 59% MoM to
14.8mn while 3G held up flat MoM at 22.7mn.
2Q14 sales reached 17.7%
QoQ, reaching high end of
guidance +12-20% QoQ
15 July 2014
Asia Semiconductor Sector 39
o New models also skewing to 4G. LTE new models also surpassed 3G for the
first time in May, and in June it accounts for 56% of total 230 new models vs 3G
29%
Figure 95: MIIT data indicates that LTE shipment is up to
35% of total units shipped in June
Figure 96: May LTE new models reached 56% of mix
0%
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TD-LTE % 2G 3G TD-LTE Source: Company data, Credit Suisse research, MIIT Source: Company data, Credit Suisse research, MIIT
■ MIIT also shows the LTE ramp accelerating throughout 2Q14. The following is a
summary of full quarter data.
o China handset shipments up. China handsets were +19% QoQ but down 24%
YoY at 119.6 mn.
o China smartphones also increase. China smartphones increased +17% QoQ
but down 13% YoY to 104.2 mn units
o 4G rises while 3G declines. 4G smartphone shipments increased 215% QoQ to
30.7 mn and is now at 40.7 mn YTD while 3G declined 7% QoQ and 33% YoY to
74.4 mn units and is now at 154mn YTD. LTE mix of handsets increased from
10% in 1Q14 to 26% in 2Q14, suggesting an accelerating ramp.
o New models also skewing to 4G. LTE new models grew 43% QoQ from 51 in
1Q14 to 298 in 2Q14, exceeding 3G new models at 284. LTE new model mix
increased from only 9% in 1Q14 to 43%, while 3G declined from 70% to 41%.
YTD, 349 new LTE models have been released vs 689 3G.
Figure 97: QTD LTE shipment has penetrated 26% of mix Figure 98: LTE new models has exceeded 3G new models
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2G 3G TD-LTE Source: Company data, Credit Suisse research, MIIT Source: Company data, Credit Suisse research, MIIT
■ Mediatek's 3Q14 still holding up for mild growth on export health. Mediatek
should enter high season in 3Q14, with a faster pick-up in August as export market
returns to normal seasonal peak. We model in LTE ramping up to 5 mn units out of 97
mn units. Our 3Q14 sales growth now implies +6.6% QoQ vs street +4.6% QoQ with
flat to slightly down GMs at 48.5% as octa-core price declines and LTE ramps, though
OpM stays steady at 24.7% and EPS at NT$8.76. Mediatek remains on track to 15mn
15 July 2014
Asia Semiconductor Sector 40
LTE shipment guidance with high-end 6595 launching next week and SoC on track for
4Q14 volume.
Figure 99: Implied 3G vs 4G run rates for China brands
including exports for Mediatek to reach our estimates
Figure 100: Implied 3G vs 4G run rates for China brands
including exports for Mediatek to reach our estimates China 1Q14 2Q14 3Q14 4Q14 2014
3G units 74 76 76 50 276
QoQ 3% 0% -34%
4G units 2 8 15 25 50
QoQ 300% 88% 67%
Total 76 84 91 75 326
QoQ 11% 8% -18%
Emerging Markets 1Q14 2Q14 3Q14 4Q14 2014
3G units 64 78 92 87 321
QoQ 22% 18% -5%
4G units 7 10 13 15 45
QoQ 43% 30% 15%
Total 71 88 105 102 366
QoQ 24% 19% -3%
Total 1Q14 2Q14 3Q14 4Q14 2014
Mediatek 3G (CS) 75 86 92 74 327
Share (%) 54% 56% 55% 54%
3G units 138 154 168 137 597
QoQ 12% 9% -18%
Mediatek 4G (CS) 0 2 5 9 15
Share (%) 0% 11% 17% 21%
4G units 9 18 28 40 95
QoQ 100% 56% 43%
Total 147 172 196 177 692
QoQ 17% 14% -10%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Factoring modest margin erosion for LTE in 2H14. We expect LTE price
competition to be high between Mediatek and Qualcomm, with QCOM MSM8916
reaching low-mid teens to compete with Mediatek's entry quad core MT6372. Margin
pressure should be manageable at 10% of volume on 4Q14 exit rate (and 5% of total
Mediatek sales), a factor diluting overall GMs by 50-100 bp. Blended ASPs are more
steady as big.LITTLE octa-core will still have 3x corporate ASP and 64 bit quad/octa
SoCs around 1.5-2x. We model 4Q14 down 11% QoQ to factor in late year
adjustments post October holiday from 3G offsetting some of the volume ramp on LTE.
Figure 101: Mediatek approaching 50% in 2015 Figure 102: Mediatek LTE on track to 15 mn units this year Smartphone chipsets 2012 2013 2014E 2015E 2016E 13-17 CAGR
Mediatek 109.8 223.2 342.4 430.7 520.2 28%
Mediatek share (%) 44% 45% 49% 52% 53%
Spreadtrum 32.0 141.1 124.6 130.0 143.5 5%
RDA - 0.5 6.0 15.0 30.0 NM
Leadcore 5.0 12.0 18.0 22.0 25.0 26%
Asian suppliers 146.8 376.8 491.0 597.8 718.7 23%
YoY Growth 1009% 157% 30% 22% 20%
Share 59% 76% 71% 72% 73%
Qualcomm 81.6 98.9 164.3 196.9 219.9 26%
Broadcom 2.5 7.0 10.0 13.0 15.0 27%
Marvell 15.0 13.0 27.0 25.0 27.0 23%
ST-Ericsson 3.5 0.5 - - - NM
Overseas suppliers 102.6 119.4 201.3 234.9 261.9 26%
YoY Growth 37% 16% 69% 17% 11%
Share 41% 24% 29% 28% 27%
Total 249.4 496.2 692.3 832.6 980.6 24%
YoY Growth 183% 99% 40% 20% 18%
2014 technology EDGE WCDMA TD-SCDMA CDMA 2000 LTE
Mediatek 51.4 208.7 72.2 - 15.2
Spreadtrum 25.1 20.5 76.8 - 2.1
RDA 5.0 3.0 - - -
Leadcore - 0.5 17.5 - -
Asian suppliers 81.5 232.8 166.4 0.0 17.3
% of shipments 16% 47% 33% 0% 3%
Share 100% 74% 89% 0% 24%
Qualcomm - 64.3 10.0 50.0 40.0
Broadcom - 10.0 - - -
Marvell - 5.4 10.8 - 15.0
ST-Ericsson - - - - -
Overseas suppliers 0.0 79.7 20.8 50.0 55.0
% of shipments 0% 39% 10% 24% 27%
Share 0% 26% 11% 100% 76%
Total 81.5 312.5 187.2 50.0 72.3
% of shipments 12% 44% 27% 7% 10% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ 4G pricing looks very competitive, but Mediatek has time to manage that margin
risk. Biggest risk is margin pressure but likely not until 2015 due to low contribution of
LTE to 2H14. Qualcomm has streamlined its supply chain and design focus and pulled
back R&D growth to compete in emerging markets at lower pricing so pricing will be
competitive by 4Q14, with LTE quad core entry dropping from US$20-25 on the
MSM8926 to low-teens by 4Q14 on the cost down MSM8916 against Mediatek’s entry
quad core MT6732. Mediatek will focus on 2nd
generation SoC design for lower cost
and a move to 20nm for better power/performance for a refresh. Important to keep in
mind that LTE at 10% of volume on 4Q14 exit rate (and 5% of total Mediatek sales)
would only dilute GMs 50-100 bp for each 10 points below corporate average LTE
starts up, giving Mediatek a couple quarters to bring out a better cost product.
■ New MT6795 – an enhanced version of MT6595. MT6795 is speculated to be the
next 64-bit octa-core LTE SoC on Mediatek's product roadmap. It will be on 28nm
15 July 2014
Asia Semiconductor Sector 41
HPM with 4 A57 + 4 A53 CPU and up to 2.2GHz. It supports 5-mode and uses
Imagination PowerVR GPU. Additionally, it integrates Mediatek's new 5-in-1
connectivity chipset MT6630, with Wi-Fi 802.11b/g/n/ac, Wi-fi Direct/Miracast, low
power Bluetooth, GPS/GLONASS and FM. MT6795 is positioned to compete head-to-
head with the high-end Snapdragon 810 and will be ready for customer sample by
December 2014 and ramp before Chinese New Year.
Figure 103: Mediatek vs Qualcomm LTE offerings – New MT 6795 timed for 1Q15 LTE Mediatek Mediatek Mediatek Mediatek Mediatek Qualcomm Qualcomm Qualcomm Qualcomm
LTE chipsets MT6590 MT6595 MT6732 MT6752 MT6795 Snapdragon 615 Snapdragon 610 Snapdragon 400 Snapdragon 410
SoC Two chip SoC SoC SoC SoC SoC SoC SoC SoC
Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 28nm LP
Multi-core Quad core Octa core Quad core Octa core Octa core Octa core Quad core Quad core Quad core
CPU Coresonic SIMT 4 Cortex A7
+ 4 A17
4 Cortex A53
64-bit
8 Cortex A53
64 bit
4 A57 + 4 A53
64-bit
8 Cortex A53
64-bit
4 Cortex A53
64-bit 4 Cortex A7
4 Cortex A53
64-bit
Baseband FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
FDD/TDD LTE
W/TD/EDGE
Frequency 1.3GHz 2.2-2.5GHz
(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz NA NA 1.6GHz 1.4GHz
GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 Adreno 405 Adreno 405 Adreno 305/306 Adreno 306
Display qHD 4K2K HD 720 HD1080 4K2K NA NA FHD FHD
Video playback H.264 & VP9 30fps 1080p 30fps 1080p 30fps H.265/H.264 NA NA 1080 HD 1080 HD
Video recording H.265 H.264 H.265/H.264
Sampling 1Q14 2Q14 3Q14 3Q14 4Q14 3Q14 3Q14 4Q13 4Q13
Ramp 2Q14 4Q14 4Q14 4Q14 1Q15 4Q14 4Q14 1Q14 2Q14 Source: Company data, Credit Suisse estimates
Figure 104: Mediatek product roadmap
Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 42
■ New LTE launches. Mediatek is hosting an official introduction of its high-end octa-
core LTE MT6595 SoC on 15 July in Shenzhen. TCL will also have a new 4G model
launch following Mediatek's event on 16 July and some expect it to be based on
MT6595. Other vendors will also have new 4G models launching in the next couple
days, including DOOV's C9 on 16 July and Lenovo's Golden Warrior A8 on 18 July,
though both will still be based on its two-chip solution.
Figure 105: Upcoming LTE smartphone launches
Company Lenovo DOOV Coolpad ZXD Mobile Maysun
Model nameGolden Warrior
A8C9 Dashen G504 MID4511
Image
Technology TDD/FDD-LTE TDD/FDD-LTE TDD/FDD-LTE FDD-LTE FDD-LTE
Operating System Android 4.3 Android 4.4 Android 4.3 Android 4.4 Android 4.3
Pixels 720 x 1280 NA 720 x 1280 720 x 1280 960 x 540
RAM 2GB 1GB 2GB 1GB 1GB
ROM 16GB 16GB 16GB 16GB 4GB
Display 5.0" 5.0" 7.0" 5.0" 4.5"
Camera 13MP + 5MP 8MP + 5MP NA 8MP + 2MP 5MP + 0.3MP
Battery NA 2000mAh NA NA 2000mAh
CPU Speed 1.7GHz 1.7GHz 1.7GHz 1.7GHz 1.7GHz
Processor ChipMT6590 +
MT6595
MT6590 +
MT6582M
MT6290 +
MT6592
MT6290 +
MT6592
MT6590 +
MT6582M
Multi-core Octa Quad Octa Octa Quad Source: Company data, Credit Suisse research, mtksj
Figure 106: Mediatek operating assumptions In mn, unless otherwise stated
Quarters Years
NT$mn unless noted 1Q14 2Q14E 3Q14E 4Q14E 2011 2012 2013 2014F 2015F
Smartphones (mn) 75.0 88.1 96.9 82.4 10.0 109.8 223.2 342.4 430.7
ASPs (US$) $10.16 $10.01 $9.89 $9.84 $13.33 $10.82 $9.93 $9.97 $9.45
Tablets (mn) 7.3 9.5 13.3 14.0 0.0 0.0 21.9 44.2 65.9
ASPs (US$) $11.26 $11.26 $11.04 $10.82 $0.00 $0.00 $12.28 $11.05 $9.99
Feature phones (mn) 88.7 84.3 81.7 69.5 530.2 391.9 354.0 324.2 262.4
ASPs (US$) $1.71 $1.64 $1.57 $1.51 $3.58 $2.26 $1.88 $1.61 $1.37
Handset/Tablet Sales 29,893 34,174 37,045 32,026 59,512 61,419 93,424 133,138 152,654
DTV 7,726 10,549 11,008 10,518 10,722 13,490 16,104 39,801 41,593
PC Optical 2,313 2,209 2,233 2,160 10,596 11,489 10,476 8,915 7,089
Consumer DVD 694 764 859 758 4,160 3,515 3,515 3,075 2,843
WLAN (Ralink) 3,831 4,144 4,158 3,812 1,867 9,365 12,450 15,945 17,265
LCD Monitor 448 702 712 694 0 0 0 2,556 2,659
STB 764 1,248 1,318 1,215 0 0 0 4,546 5,265
Op M% 23.5% 24.6% 24.7% 20.7% 14.2% 12.5% 18.6% 23.4% 23.3%
EPS $6.82 $8.01 $8.76 $6.61 $12.52 $12.81 $20.13 $30.00 $33.00 Source: Company data, Credit Suisse estimates
■ Maintain OUTPERFORM; LTE catalyst should emerge from late 3Q14. We
maintain our 2014/2015E EPS at NT$30/NT$33 and our NT$570 TP on 19x 2014E
EPS balancing out upside from export growth and LTE ramp with modest initial impact
on GMs in the early ramp. We stay constructive as we still see the next 12-18 months
extending the product cycle with LTE, with Mediatek now showing progress launching
its solutions. Near-term catalysts should include its MT6595 octa-core SoC launch on
15 July and LTE SoCs in late 3Q14.
Maintain OUTPERFORM
with a NT$570 target price
15 July 2014
Asia Semiconductor Sector 43
Figure 107: Mediatek PE band – trading at 17x 2014 EPS Figure 108: Mediatek Qfii holding now at 62%
10x
15x
19x
50
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450
550
650
750
Jul/01 Jul/02 Jul/03 Jul/04 Jul/05 Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14
NT$ Mediatek US GAAP PE Band
ccccccccccccccccccccccc
25x
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
0
100
200
300
400
500
600
700
Jul-0
1
Mar
-02
Oct
-02
May
-03
Dec
-03
Jul-0
4
Mar
-05
Oct
-05
May
-06
Dec
-06
Aug
-07
Mar
-08
Oct
-08
Jun-
09
Jan-
10
Aug
-10
Mar
-11
Oct
-11
Jun-
12
Jan-
13
Aug
-13
Apr
-14
Mediatek QFII % (RHS) Mediatek Price NT$ (LHS) Mediatek QFII as % of TAIEX QFII (%)
NT$ %NT$ %NT$ stock %
-2 STD
-1 STD
+1 STD
+2 STD
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research, TEJ
Realtek: 2Q14 sales upside consistent with CS as PC
growth offsets mixed wireless outlook
Earnings details: TBD
Figure 109: Realtek 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs Street
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales $8,045 $7,776 Up $8,293 $8,105 $7,485 $7,800 $31,156 $30,882 $32,659 $32,062 $33,958 $33,869
QoQ 9.7% 6.5% 3.1% 4.2% -9.7% -3.8% 10.6% 9.6% 4.8% 3.8% 4.0% 5.6%
GM (%) 44.1% 43.2% Flat +/- 44.0% 43.0% 44.0% 43.0% 44.0% 43.1% 44.1% 42.2% 44.1% NA
OpM (%) 10.3% 9.6% 9.7% 9.9% 5.6% 8.5% 9.1% 9.4% 9.3% 8.1% 10.2% 8.4%
Net Inc. 863 815 848 832 500 781 3,031 3,160 3,200 2,941 3,565 3,331
EPS (NT$) $1.71 $1.61 $1.68 $1.63 $0.99 $1.48 $6.00 $6.47 $6.34 $5.90 $7.06 $6.63
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 in line with CS expectations but above street. Realtek June sales declined
3.1% MoM to NT$2.45 bn, taking 2Q14 to grow 10.2% QoQ, in line with CS 9.8% QoQ
and company guidance for growth across communications networks, computer
peripheral and multimedia. We note that street has lagged reflecting upside so still
modelling 6% QoQ growth for 2Q14. The company expects July will be slightly better
than June, as customers traditionally hold back orders at quarter end to better manage
inventory levels. It has not seen correction through July and 3Q is a normal seasonal
peak, though will continue to monitor any year end slowdown.
■ Mature PC products, audio codec and TVs coming back on share gains. 2Q14
sales were mainly driven by PC as market stabilises and Realtek gains share since
competitors (Atheros, Broadcom) exit mature products (10/100, HD audio codec and
Gigabyte NIC). Other areas of growth include Internet (gigabyte Ethernet switch,
ASDL, router, card reader) and some Audio for consumer (CE codec reference
designs with Intel and NVIDIA on Xiaomi's tablet). TV growth is also up 40% YoY with
traction with the Chinese brands (Hisense, TCL, Skyworth).
■ Wifi in tablets/smartphones more mixed. Realtek's wireless/Wifi outlook remains
mixed with mobile Wifi weaker as China whitebox smartphone growth slows down YoY
and its main customer Spreadtrum still suffering. In tablets, the whitebox have slowed
materially this year although Realtek has secured more branded designs with Lenovo,
Acer and Asus on Intel's reference design. The company is sampling GPS and
Wifi+BT 4.0 to improve its connectivity offering.
2Q14 grew 10% QoQ, in
line with CS expectations
15 July 2014
Asia Semiconductor Sector 44
■ GMs holding stable. Realtek noted its ASPs have been stable and not seeing ASP
erosion from pricing pressure, as competitors exit the mature product market. We
believe pricing is managed to normal seasonal decline across products to keep GMs
around 43-44% vs our estimate of 44.1%.
■ ISSC sale provides a one-time EPS boost in 2014. Microchip announced on 22 May
its acquisition of ISSC, a low power Bluetooth and advanced wireless company, to
complement its initiatives in wireless and IoT. Microchip offers a tender offer to acquire
all ISSC outstanding shares for NT$143/share (16.7% premium), with the deal
expected to close in 3Q14 and merger to close in 4Q14. Realtek now holds 10.91% of
ISSC (down from 19% in 4Q13), so we estimate the transaction could contribute an
after tax one-time non-operating gain of NT$728 mn or NT$1.44 EPS, slightly lower
than local press estimates of NT$1.64, on top of CS/Street 2014 EPS estimate of
NT$6.0/NT$6.32.
Figure 110: Realtek Non-operating gain from Microchip's ISSC acquisition
2Q14 ISSC sale Non-operating gain
Realtek ISSC ownership % 10.91%
Total ISSC shares held 7,025,000
Microchip acquisition price (NT$) 143
Revenue from sale (NT$mn) 1,005
Holding cost (NT$mn) 196
Non-op profit booked (NT$mn) 809
Tax rate 10%
After tax Non-op profit (NT$mn) 728
Realtek outstanding shares 505
EPS contribution (NT$) 1.44
2014E EPS estimate (NT$) 6.00
2014E EPS + Non-op gain (NT$) 7.44 Source: Company data, Credit Suisse estimates
■ Maintain NEUTRAL. We maintain our 2014/2015 EPS at NT$6.00/NT$6.34, vs street
NT$6.32/NT$5.92. We stay NEUTRAL and our target NT$84, based on 14x 2014E
EPS. We still view Realtek product cycles mixed, with mild growth drivers from Wifi
into more applications and TV gains from a low base (8-10% of sales) offset by 40%
PC exposure, a segment that bounced but sustainability is in question. Realtek is now
trading at 16.4/15.5x 2014/2015 P/E.
Figure 111: Realtek trading slightly above peers median P/E
Price Mkt Cap P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales)
Company 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015
Realtek $93.80 $1,582 15.5 15.6 14.8 2.4 2.8 2.7 15.6 17.9 17.9
Novatek $151.50 $3,080 19.4 15.0 13.9 3.7 3.4 3.2 19.3 22.7 23.1
Qualcomm $79.60 $134,355 17.6 15.2 13.4 3.9 4.0 3.7 22.4 26.0 27.5
PMCS $7.36 $1,434 22.3 19.7 16.2 2.6 2.4 2.2 n.a. 11.6 12.4
Broadcom $37.78 $22,101 13.9 15.0 14.3 2.6 2.3 2.0 19.9 15.8 14.3
Marvell $14.11 $7,171 16.4 13.6 12.2 1.8 1.6 1.5 11.1 11.5 12.2
Skyworks $47.23 $8,954 21.5 16.0 13.5 4.2 3.7 3.2 21.0 21.7 21.1
Median 17.5 15.4 13.7 3.2 3.1 2.9 19.6 19.8 19.5
Mean 18.0 15.7 13.8 3.3 3.1 2.7 18.2 21.1 20.9 Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 45
Figure 112: Realtek is trading at 16x 2014E EPS, in line with IC design peers at 14.1x P/E
6x
10x
16x
22x
0
30
60
90
120
150
180
Jul/01Jul/02Jul/03Jul/04Jul/05Jul/06Jul/07Jul/08Jul/09Jul/10Jul/11Jul/12Jul/13Jul/14
NT$ Realtek US GAAP PE Band
Source: Company data, Credit Suisse research
WPG: Sales beats expectations on smartphone
growth and PC demand improvement
Earnings details: TBD
Figure 113: WPG CS and Street estimates summary for 2Q14/3Q14/4Q14 and 2014/2015 In mn, unless otherwise stated
2Q14 3Q14 4Q14 2014 2015 2016
(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street
Sales $109,799 $111,298 NT$105-110bn $119,132 $120,885 $111,388 $115,492 $442,648 $448,186 $480,147 $480,852 $518,003 $519,141
Chg 7.3% 8.8% Up 2.6-7.5% 8.5% 10.1% -6.5% -4.5% 9.0% 10.3% 8.5% 7.3% 7.9% 8.0%
GM (%) 4.6% 4.5% 4.4-4.7% 4.6% 4.5% 4.6% 4.5% 4.6% 4.5% 4.6% 4.5% 4.6% NA
Op.M(%) 1.8% 1.8% 1.65-1.9% 1.8% 1.8% 1.5% 1.7% 1.7% 1.7% 1.8% 1.8% 1.9% 1.9%
Net Inc. 1,498 1,414 NT$30.1 to US$1 1,576 1,634 1,186 1,453 5,656 5,722 6,378 6,536 6,947 6,992
EPS (NT$) $0.90 $0.86 $0.95 $0.98 $0.72 $0.87 $3.42 $3.42 $3.85 $3.85 $4.20 $4.22 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
■ 2Q14 beat with customer strength, 3Q14 could grow close to 10% QoQ. 2Q14
sales reached NT$113.7bn, +11% QoQ, significantly above guidance of 3-8% QoQ
growth. WPG noted that 2Q14 will see even growth across all end markets, with
smartphone growth persisting. It also expects to see incremental rebound in PC/NB
driven by replacement demand as Microsoft discontinued Windows XP support. GM
was guided 4.4-4.7%, vs CS/Street 4.6%/4.5% and OpM was guided 1.65-1.9% and
we model at the high end at 1.8% with operating leverage from better sales. WPG
views 2014 slightly more second half loaded with seasonal peak in 2Q/3Q and does
not see a major 4Q correction yet. We model 3Q14 sales +9% QoQ, near street of
+10% QoQ as the customer sees builds for smartphones, Apple related and some
improvement in PC orders.
■ Margins seeing initial signs of stabilisation. WPG has worked to reduce its PC
exposure and increase mix of lower margins mobile products, which has dampened its
GMs. However, it sees GMs to stay around 4.5-4.7% in the long-term as product mix
finally stabilises. We estimate smartphone + tablet currently contribute 45-48% of total
revenue, with tablets accounting for less than 50% of computer and the company
targets to raise it to half by end of the year. WPG now increases its focus on OpM
through Opex control measures, including subsidiary consolidation to improve
operations and efficient staffing away from the PC segment. Full year Opex is targeted
at NT$2.9-3.1 bn/quarter, with Opex/sales down from 3.6% in 1Q12 to 2.8%, though
Opex could see a small uptick in 4Q14.
15 July 2014
Asia Semiconductor Sector 46
■ Maintain NEUTRAL. We keep our 2014/2015E EPS at NT$3.42/NT$3.85, in line with
street. We stay NEUTRAL and keep our target price at NT$41, based on 12x 2014
EPS. WPG offers emerging market unit exposure and solid 6-7% dividend yield based
on NT$2.40 payout, but the stock is fairly valued at 11.9x 2014 EPS and 1.5x P/B,
above average for its IT distribution peers at 10.6x P/E and 1.4x P/B .
Figure 114: WPG trading slightly above its distributor peers
Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x)
Company Ticker 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015
WPG 3702.TW 40.55 2,243 0.3 0.3 0.3 14.1 11.9 10.5 1.7 1.5 1.4
WT Micro 3036.TW 45.05 508 0.1 0.1 0.1 11.7 10.1 9.0 1.2 1.2 1.2
Synnex 2347.TW 46.65 2,473 0.3 0.3 0.3 14.1 13.4 11.4 1.7 1.7 1.6
Arrow ARW 60.41 6,019 0.4 0.4 0.3 12.1 10.6 9.7 1.4 1.4 1.2
Avnet AVT 43.45 6,013 0.3 0.3 0.2 12.5 10.4 9.4 1.4 1.3 1.1
Median 0.3 0.3 0.3 12.5 10.6 9.7 1.4 1.4 1.2
Mean 0.3 0.2 0.2 12.9 11.3 10.0 1.5 1.4 1.3 Source: Company data, Credit Suisse estimates
15 July 2014
Asia Semiconductor Sector 47
Companies Mentioned (Price as of 14-Jul-2014)
ASM Pacific Tech. (0522.HK, HK$84.4, OUTPERFORM, TP HK$97.0) AU Optronics (2409.TW, NT$13.8) Acer Group (2353.TW, NT$21.95) Advanced Semicon. Engr. (2311.TW, NT$39.4, OUTPERFORM, TP NT$47.0) Airtac (1590.TW, NT$281.0) Amkor Technology Inc. (AMKR.OQ, $11.11) Apple Inc (AAPL.OQ, $95.23) Asustek (2357.TW, NT$326.0) BlackBerry (BBRY.OQ, $11.51) Broadcom Corp. (BRCM.OQ, $37.78) Catcher Technology (2474.TW, NT$275.0) Chicony (2385.TW, NT$82.6) Chipbond (6147.TWO, NT$51.9) Chroma (2360.TW, NT$87.6) Compal Electronics (2324.TW, NT$26.8) Coretronic Corp (5371.TWO, NT$33.4) Delta Electronics (2308.TW, NT$205.0) Digital China Holdings Limited (0861.HK, HK$6.86) E Ink Holdings Inc (8069.TWO, NT$20.2) Elan Microelectronics Corp (2458.TW, NT$55.1) Epistar Corporation (2448.TW, NT$74.1) Everlight Electronics Co Ltd (2393.TW, NT$77.1) Foxconn Technology Corp (2354.TW, NT$74.5) G-Tech (3149.TW, NT$33.95) HTC Corp (2498.TW, NT$139.0) Hiwin (2049.TW, NT$332.0) Hon Hai Precision (2317.TW, NT$110.0) Innolux Corporation (3481.TW, NT$15.2) Intel Corp. (INTC.OQ, $31.25) International Business Machines Corp. (IBM.N, $188.0) Kinsus Interconnect Tech (3189.TW, NT$130.5) Largan Precision (3008.TW, NT$2560.0) Lenovo Group Ltd (0992.HK, HK$10.9) Lextar (3698.TW, NT$29.6) Lite-On Technology (2301.TW, NT$54.3) MediaTek Inc. (2454.TW, NT$503.0, OUTPERFORM, TP NT$570.0) Nan Ya Printed Circuit Board (8046.TW, NT$48.4) Nokia (NOK1V.HE, €5.48) Novatek Microelectronics Corp Ltd (3034.TW, NT$151.5) Pegatron (4938.TW, NT$59.4) Powertech Technology (6239.TW, NT$51.5) QUALCOMM Inc. (QCOM.OQ, $79.6) Quanta Computer (2382.TW, NT$85.7) RDA Microelectronics (RDA.OQ, $17.3) Radiant Opto-Electronics (6176.TW, NT$136.0) Realtek Semiconductor (2379.TW, NT$93.8) STMicroelectronics NV (STM.PA, €6.46) Samsung Electronics (005930.KS, W1,286,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.75) Siliconware Precision (2325.TW, NT$49.8) Silitech Technology Corp (3311.TW, NT$34.05) Synnex Technology International Corp (2347.TW, NT$46.65) TPK Holdings (3673.TW, NT$263.0) TXC Corp. (3042.TW, NT$46.2) Taiwan Semiconductor Manufacturing (2330.TW, NT$132.5, OUTPERFORM, TP NT$150.0) Taiwan Surface Mounting Technology (6278.TW, NT$45.55) Teco (1504.TW, NT$34.65) Topoint Technology Co Ltd (8021.TW, NT$31.75) Tripod Technology (3044.TW, NT$59.1) Unimicron Technology Corp (3037.TW, NT$28.2) United Microelectronics (2303.TW, NT$15.85) Vanguard International Semiconductor (5347.TWO, NT$47.7) WPG Holdings Ltd (3702.TW, NT$40.55) Wintek Corp (2384.TW, NT$10.9) Wistron (3231.TW, NT$30.6) Xilinx (XLNX.OQ, $48.25) Young Fast Optoelectronics (3622.TW, NT$28.65)
Disclosure Appendix
Important Global Disclosures
I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
15 July 2014
Asia Semiconductor Sector 48
3-Year Price and Rating History for ASM Pacific Tech. (0522.HK)
0522.HK Closing Price Target Price
Date (HK$) (HK$) Rating
29-Jul-11 85.60 71.50 U
30-Oct-11 95.40 68.00
08-Mar-12 98.95 79.50
25-Apr-12 103.10 89.50 N
27-Jul-12 101.10 77.50 U
22-Aug-12 85.05 73.50
26-Oct-12 86.70 67.50
07-Mar-13 101.60 93.00 N
24-Apr-13 78.80 72.50
26-Jul-13 86.20 75.50
04-Nov-13 68.05 55.20 U
27-Feb-14 70.25 78.00 O
13-Mar-14 67.50 *
24-Apr-14 82.80 97.00 O
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
N EU T RA L
O U T PERFO RM
3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)
2311.TW Closing Price Target Price
Date (NT$) (NT$) Rating
10-Aug-11 23.06 28.33 O
31-Oct-11 23.64 29.83
23-Apr-12 25.40 31.58
26-Jul-12 19.48 27.20
26-Apr-13 25.85 31.00
16-Jul-13 25.35 R
29-Aug-13 25.45 31.00 O
09-Oct-13 29.00 34.00
20-Dec-13 27.25 31.50
10-Feb-14 29.15 32.50
08-Apr-14 33.45 40.00
28-Apr-14 34.75 42.00
08-Jul-14 39.90 47.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
3-Year Price and Rating History for MediaTek Inc. (2454.TW)
2454.TW Closing Price Target Price
Date (NT$) (NT$) Rating
28-Jul-11 266.00 255.00 U
07-Sep-11 282.50 260.00
31-Oct-11 318.00 306.00
06-Jan-12 278.50 270.00
04-Apr-12 277.00 300.00 N
30-Apr-12 253.00 260.00
25-Jun-12 280.50 300.00
29-Jun-12 273.00 R
27-Jun-13 328.00 400.00 O
09-Sep-13 370.00 440.00
01-Nov-13 404.50 480.00
06-Jan-14 431.50 500.00
08-Apr-14 460.00 540.00
01-May-14 472.00 570.00
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
N EU T RA L
REST RICT ED
O U T PERFO RM
15 July 2014
Asia Semiconductor Sector 49
3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)
2330.TW Closing Price Target Price
Date (NT$) (NT$) Rating
03-Oct-11 68.60 77.00 O
27-Oct-11 71.90 79.00
19-Mar-12 83.70 90.00
27-Apr-12 86.00 95.00
19-Jul-12 77.50 87.00
08-Oct-12 89.10 95.00 N
06-Dec-12 96.60 109.00 O
19-Apr-13 106.50 116.00
19-Feb-14 108.00 122.00
12-Mar-14 113.00 130.00
18-Apr-14 123.00 137.00
10-Jul-14 134.50 150.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relativ e to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 45% (54% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 13% (48% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
15 July 2014
Asia Semiconductor Sector 50
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Price Target: (12 months) for ASM Pacific Tech. (0522.HK)
Method: Our target price of HK$97.00 for ASM Pacific is based on 5x forward P/B with a HK$19.42 BVPS for 2015E. In prior industry cycles from 2001-12, ASM's share price bottomed at a 3x trough cycle P/B and peaked at 7x upcycle P/B. With a cyclical upturn, we value ASM with an up-cycle valuation of 5x 2015E P/B.
Risk: Risks to our HK$97.00 target price for ASM Pacific include: (1) a shorter-than-expected recovery in semiconductor equipment investment, which would have a direct negative impact on ASM's backend equipment business. (2) The cyclical nature of the semiconductor industry and a short order leadtime are the major risks in terms of the accuracy of earnings forecasts, which form the basis of our target price derivation.
Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW)
Method: Our NT$150 target price for TSMC is reflective of 15x average 2014/2015 EPS. We stay positive on the stock with TSMC's business holding better in 2014 on 28nm/20nm strong share and into 2015 where 20nm SoC and 16nm FinFET tape-outs are building and dividend likely rises with higher FCF
Risk: The risks that may impede achievement of our NT$150 target price for TSMC include: (1) low free cash flows, which we believe will rebound starting in 2014; (2) inventory correction risk; (3) a slowdown in smartphone and tablets, mitigated by Apple’s ramp next year and a push up in specs by the China brands; and (4) Apple shifting business to other foundries after 20nm though we believe TSMC can grow this customer in 2014 and 2015 even if it only ramps to 40% allocation.
Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW)
Method: Our NT$47 target price for ASE is based on 2.4x forward P/B (price-to-book), back to the levels it reached during the prior 2000, 2002, 2004 and 2007 upturns. We see potential catalysts for continued re-rating from ramp of more SiP projects, resumption of K7 operations, start of Apple A8 packaging and test, and growth from DRAM.
Risk: Risks that could impede achievement of our NT$47 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected. (5) 2H14 inventory correction.
Price Target: (12 months) for MediaTek Inc. (2454.TW)
Method: Our target price of NT$570 for MediaTek Inc. is based on 19x 2014E EPS of NT$30, as ASP/GMs mix improves but still reflects a bit of risk on the 3G to 4G transition in the coming few months.. We believe the stock can reach that level by year-end on successful LTE launch, similar to its range the past few years. We are positive on Mediatek due to: (1) a strong product cycle in emerging market smartphone and tablets; (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions; and (3) additional drivers from China brands ramping export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.
Risk: Risks that could impede achievement of our NT$570 target price for Mediatek include volatility near-term due to 1) post-May holiday lull, 2) risk of price cuts on 3G from QCOM ahead of the high season, and 3) LTE news flow starts out negative as QCOM, BRCM, MRVL and INTC have solutions ahead of Mediatek's competitive SoCs from late 3Q14.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (2330.TW, 2311.TW, 2454.TW, 3149.TW, 3481.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2357.TW, 0861.HK, 2354.TW, 2317.TW, 2498.TW, 3034.TW, 2448.TW, 2353.TW, 3231.TW, 005930.KS, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (2311.TW, 3149.TW, 3481.TW, 0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) within the past 12 months.
15 July 2014
Asia Semiconductor Sector 51
Credit Suisse provided non-investment banking services to the subject company (0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, XLNX.OQ, IBM.N, INTC.OQ) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (2311.TW, 0992.HK, IBM.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (2311.TW, 3149.TW, 3481.TW, 0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0522.HK, 2311.TW, 2454.TW, 3149.TW, 3008.TW, 3481.TW, 2384.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2474.TW, 3044.TW, 2357.TW, 0861.HK, 2458.TW, 2317.TW, 2498.TW, 3034.TW, 3698.TW, 1504.TW, 3673.TW, 2448.TW, 8046.TW, 2301.TW, 2353.TW, 3231.TW, 2308.TW, 2385.TW, 005930.KS, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ, 6239.TW, 5347.TWO) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, XLNX.OQ, IBM.N, INTC.OQ) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (BBRY.OQ, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2330.TW, 2311.TW, 2454.TW, 3149.TW, 3622.TW, 5371.TWO, 3008.TW, 3481.TW, 2409.TW, 2049.TW, 3037.TW, 2324.TW, 4938.TW, 2474.TW, 3042.TW, 6147.TWO, 2357.TW, 2458.TW, 2317.TW, 2498.TW, 3034.TW, 1504.TW, 2347.TW, 3673.TW, 2448.TW, 6176.TW, 2301.TW, 2353.TW, 2382.TW, 3231.TW, 2308.TW, 2385.TW, 6239.TW, 5347.TWO, 3702.TW, 2379.TW, 2325.TW, 2303.TW).
Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd.
Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for the announced acquisition of server business of IBM Corp. Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Motorola Mobility Group from Google.
Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison.
Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0522.HK, 2330.TW, 2311.TW, 2454.TW, 3149.TW, 3622.TW, 5371.TWO, 3008.TW, 3481.TW, 2409.TW, 2049.TW, 2384.TW, 8021.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2474.TW, 3189.TW, 1590.TW, 3042.TW, 3044.TW, 6147.TWO, 2357.TW, 0861.HK, 2354.TW, 2458.TW, 2317.TW, 2498.TW, 3311.TW, 3034.TW, 3698.TW, 1504.TW, 2360.TW, 2347.TW, 3673.TW, 2393.TW, 6278.TW, 2448.TW, 8046.TW, 6176.TW, 2301.TW, 2353.TW, 2382.TW, 3231.TW, 2308.TW, 2385.TW, 005930.KS, BBRY.OQ, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ, 6239.TW, 5347.TWO, 3702.TW, 2379.TW, 2325.TW, 2303.TW, 0981.HK) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (NOK1V.HE).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2311.TW, 3481.TW, 0992.HK, 0861.HK, 3034.TW, NOK1V.HE, IBM.N, INTC.OQ, RDA.OQ) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports
15 July 2014
Asia Semiconductor Sector 52
written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse AG, Taipei Securities Branch ........................................................................................................ Randy Abrams, CFA ; Nickie Yue
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
15 July 2014
Asia Semiconductor Sector 53
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